TRIS Rating Affirms Company Rating of “KH” at “A-” with “Stable” Outlook

TRIS Rating Co., Ltd. has affirmed the company rating of Bangkok Chain Hospital PLC (KH) at “A-” with “stable” outlook. The rating reflects the company’s leading position in the managed care segment, a diversified revenue base, experienced management, and operational efficiency. The rating is partially offset by intense competition in the healthcare industry, execution risks inherent in future expansions, and exposure to regulatory risks.

The “stable” outlook reflects the expectation that KH will continue to maintain its market strength in the managed care sector and employ a cautious financial policy to balance the funding sources for the investment projects. The rating is very solid within the current category and should remain relatively strong despite the downside risks from the business expansion efforts.

TRIS Rating reported that KH owns and operates six general hospitals, four of which are located in Greater Bangkok under the name “Kasemrad Hospital”, while the other two are in Chiangrai and Saraburi provinces. Revenues are derived from three patient groups: walk-in, social security coverage (SC) and universal coverage (UC). In 2009, revenue contributions from walk-in, SC, and UC were 56%, 24%, and 20%, respectively. KH decided to pull out from the UC system in 2010. The impact is expected to be limited given the low margin in the UC segment. KH has a solid market position as a leading private hospital participating in the managed care scheme. Its SC market share in Bangkok in terms of the number of registered persons has ranged from 9%-11% over the past five years. Sizable bases of registered persons allow the company to achieve economies of scale. Revenue diversity helps enhance stability in operating performance. The public healthcare schemes also help absorb overhead expenses with recurring cash flows and sustain utilization levels for capital-intensive facilities. Effective cost control policies are evidenced by relatively stable margins over the past five years.

TRIS Rating said the credit rating of KH reflects the execution risks for the expansion plans in Chaengwattana and Pattaya. The company’s market strength in higher-end segments is viewed as less valuable than the current business operation due to a limited track record and limited brand recognition. The company is highly exposed to regulatory risks with regard to the public healthcare schemes. The public healthcare system in Thailand is not fully mature and may undergo several reformations in the foreseeable future. We believe that the management team is adept and can handle the future regulatory challenges so as to sustain competitiveness in the marketplace.

The financial profile of KH is strong and better than industry peers. The revenue growth rates over the past five years were very solid, averaging more than 10%. Operating margins are relatively stable, ranging from 26%-29% for the past five years. The balance sheet is healthy with a low debt to capitalization ratio. The ratio is expected to rise to as high as 35% in 2010-2012 as the company expands. The credit rating already incorporates the financial implications of such circumstances. Cash flow protection remains very strong due to healthy earnings and a low gearing ratio. KH’s ability to service its debt obligations is good and we do not envision any liquidity stress over the next 12-18 months, said TRIS Rating . -- End

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