Medikaloka Hermina HEAL IJ
January 28, 2020 - 5:36pm EST by
2020 2021
Price: 3,390.00 EPS 105 125
Shares Out. (in M): 2,973 P/E 32 27
Market Cap (in $M): 740 P/FCF 14 13
Net Debt (in $M): 100 EBIT 0 0
TEV (in $M): 840 TEV/EBIT 18 15

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One of the best structural stories in Asia is in healthcare and in particular Indonesia, where we like Hermina Hospital Group (HEAL IJ).  HEAL is Indonesia’s second largest private hospital and the largest private hospital group in Greater Jakarta area.  Stock currently trades at 12x EV/EBITDA despite expected earnings growth in the high teens over the next few years. HEAL only has a market cap of $740MM USD and is overlooked vs. larger sized peers who trade with much higher liquidity.


From a top down point of view, the structural growth story of HEAL is amongst the most attractive we’ve found in Asia.  Like any of the structural growth stories in Asia, growth in the healthcare sector is driven by changing demographics and improving purchasing power.  Middle class in Indonesia represents 67% of the country’s population largely due to a shift towards urbanization.  Urbanization is highly correlated with more people moving from lower-income to middle-income class which translates into rising demand for healthcare services due to an increase in lifestyle related diseases. 


Looking at healthcare spend as a % of GDP, Indonesia has one of the lowest penetrations in the region – expected at 3% by 2021 vs. 20% in the US, 9% in Japan, 7% in Thailand and 6% in China. In additional, hospital beds in the country are scarce presenting large growth opportunities for private players in the market.  Bed per 1,000 population in Indonesia is only a 2.1 while it’s closer to 12 in Japan and 6 in China.  Looking at the industry, the market is very fragmented with HEAL representing only 1% of total hospitals in the country or 0.8% of total beds.  Given the small bed capacity of individual hospitals and Indonesia’s growing population pushing up higher bed capacity, we expect that overall market will expand over the forseeable future. 


Looking at the space, we expect HEAL’s earnings to CAGR close to 18% over the next few years driven by new hospital openings and newer hospitals maturing and becoming more profitable.   Number of hospitals is expected to grow from 32 today to 40 in 2020 while beds will increase from 3,350 to 4,000.  Looking at the players in the space, we like HEAL’s balance approach of pursuing development and growth while also supporting stable margins.  If we look at the landscape, HEAL has grown from 22 hospitals in 2015 to 32 hospitals in 2018 while the two other large players (SILO/MIKA) grew from 20 to 35 and from 12 to 21 respectively.  Comparing EBITDA growth over this period, HEAL’s EBITDA CAGR was 20% vs. MIKA’s at 12% and SILO’s at 9%.  The more aggressive nature of hospital openings by HEAL’s competitors has led larger margin contraction/slower EBITDA growth as opening of new hospitals results in fixed costs and G&A expenses to spike up while revenue lags as patient traffic tends to lag costs.  HEAL has continued to maintain a balanced approach where ~50%+ of the revenue is made up of mature hospitals vs. 30% comps like SILO.  Mature hospitals have a disproportionate contribution to both revenue and EBITDA as new hospitals during the expansion period are all loss-making. 

A second benefit of HEAL’s business models vs. others in the market is that it uses standardized designs for the construction of its hospitals, resulting in cost efficiencies and higher payback periods.  For example, HEAL’s capex per new hospital is ~Rp150bn with an average cost per bed of Rp0.91bn.  On the other hand, competitors capex is twice those of HEALS resulting in average cost per bed of Rp1.5bn. 


One last structural advantage on HEAL’s business model is that it is the only operator that has adopted a doctor-partnership model.   Under this structure, doctors hold up to 30% minority stake in each of the hospitals in return for a share of the dividend distributions.  The biggest advantage for HEAL is the high retention rate of doctors (>92%) in its hospital system.    Indonesia has a shortage of doctors in the healthcare industry resulting in a key barrier to entry. Doctors per 1,000 capita is expected to be 0.6 by 2021, the lowest compared to other countries with the UK, US and Japan at 3, China at 2.5, Malaysia at 2, Vietnam at 1 and India below 1.  Not only is retention rate much higher under the partnership model, but it has helped HEAL recruit qualified doctors.


As stated, we are buying a quality business with high barriers to entry and large tailwinds at 12x EBITDA.  We believe EPS can CAGR at high double digits over the next few years.  Management has also announced plans to improve operational efficiencies which provide further upside to margins – these include centralizing procurement across all the hospitals, converting to a digital system to help control costs.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Stock currently trades at 12x EV/EBITDA despite expected earnings growth in the high teens over the next few years. HEAL only has a market cap of $740MM USD and is overlooked vs. larger sized peers who trade with much higher liquidity.

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