en macquarie silo initiation
Siloam Hospitals
INDONESIA
Bridging the credibility gap
Initiating with a Neutral recommendation; prefer LPKR
We initiate coverage of SILO with a Neutral recommendation and Rp15.0k
valuation and PT. We believe SILO is well placed to become Indonesia’s
preeminent private hospital operator, and be at the forefront of the long term
development of Indonesia’s underserviced healthcare sector.
However, the company’s valuation metrics are already very high, and appear to
anticipate the seamless delivery of the company’s aggressive growth targets,
whereas we believe medium term execution risks are much higher than the
market currently perceives, and that SILO’s guidance on the timeframes for the
ramp-up of its immature/new hospitals’ profitability is too aggressive. The stock
has also already rallied 60% this year despite relatively-weak 1Q–2Q14A results.
SILO IJ
Price (at 06:56, 06 Oct 2014 GMT)
Neutral
Rp15,200
Valuation
Rp
15,000
- DDM
We therefore believe now may not be the optimal entry-point. In the meantime,
we believe a vastly superior way to play the story is through SILO’s listed parent
LPKR, given that at-market, LPKR’s 78.9% stake represents 66.0% of LPKR’s
market cap, despite SILO’s minimal contribution to LPKR’s earnings at present.
A wide open opportunity – long term
12-month target
Rp
15,000
Upside/Downside
%
-1.3
12-month TSR
%
-1.3
Volatility Index
Low/Medium
GICS sector
Health Care Equipment & Services
Market cap
Rpbn
17,571
Market cap
US$m
1,410
Free float
%
100
30-day avg turnover
US$m
6.8
Number shares on issue
m
1,156
Indonesia’s healthcare sector remains significantly underdeveloped, with
healthcare spending currently sitting at just 3% of GDP, vs. 4–5% for regional
peers, and DM averages of c10%. A contributing factor has been a significant
deficit in the quality of available domestic healthcare services, which has caused
affluent Indonesians to seek medical care abroad. Any successful elevation of
domestic healthcare standards towards international norms therefore represents
a major opportunity. Furthermore, SILO stands a good chance of being a leading
player in driving this upgrading, given its scale, access to funding, brand,
preferential access to sites/rental terms, and other first-mover advantages.
Investment fundamentals
SILO’s FY14E PER is an exceptionally high c200x. However, we discuss how
this is overstated by the presence of a number of immature hospitals in SILO’s
portfolio, which generally book losses in early years. Considering the profitability
of its 4 mature hospitals alone, the stock is trading on a PER of about 110x, and
this multiple would drop to only 37x if SILO’s 13 immature hospitals were
eventually able to achieve the similar per-hospital profitability as SILO’s mature
hospitals. In addition, the company has another 23–29 hospitals in the pipeline.
Year end 31 Dec
Revenue
EBIT
EBIT growth
Reported profit
Adjusted profit
EPS rep
EPS rep growth
EPS adj
EPS adj growth
PER rep
PER adj
Total DPS
Total div yield
ROA
ROE
EV/EBITDA
Net debt/equity
P/BV
2013A 2014E 2015E 2016E
bn 2,503.6 3,335.9 4,256.0 5,676.7
bn
74.2 169.6 206.5 239.8
%
nmf 128.6
21.8
16.1
bn
49.9
87.1
83.2
63.6
bn
49.9
87.1
83.2
63.6
Rp
47.4
75.3
72.0
55.0
%
nmf
58.9
-4.5 -23.6
Rp
45.9
75.3
72.0
55.0
%
nmf
64.0
-4.5 -23.6
x 320.7 201.8 211.2 276.3
x 330.8 201.8 211.2 276.3
Rp
0.0
7.5
7.2
8.3
%
0.0
0.0
0.0
0.1
%
2.9
6.1
6.1
5.6
%
3.1
5.3
4.8
3.5
x
63.1
39.7
31.5
25.2
%
-4.2
6.1
44.7
80.3
x
10.9
10.3
9.9
9.6
Source: FactSet, Macquarie Research, October 2014
(all figures in IDR unless noted)
Analyst(s)
Lyall Taylor
+62 21 2598 8489
lyall.taylor@macquarie.com
7 October 2014
PT Macquarie Capital Securities
Indonesia
Valuation expensive, but not as high as it looks
However, execution and overexpansion risks are high
However, while the opportunity is considerable longer term, the risk with long
term thematics is often not the long term but the short term. Healthcare spending
as a percentage of GDP has actually been relatively flat in recent years, and the
major industry bottleneck at present is not the availability of facilities, but the
limited availability of quality doctors, where standards remain far below
international norms. This human capital upgrading will likely be a very slow
process, and in the meantime, Indonesia will likely remain uncompetitive with
regional peers, and suffer a growing deficit in the medical tourism trade.
In addition, new hospitals are highly capital intensive and usually require years of
gestation losses, and we see significant risks of SILO’s aggressive hospital rollout programme resulting in a below-expectation ramp-up in occupancy rates and
profitability, which could drive escalating losses and FCF deficits medium term.
Please refer to page 51 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Siloam Hospitals
Macquarie Research
Inside
Company profile
Bridging the credibility gap: The bull case 3
Hospital footprint
The bear case: So why the Neutral?
SILO is currently Indonesia’s largest private hospital operator, with a portfolio
9
Valuation
19
Risk analysis
23
Company profile and operations
26
Summary of our earnings forecasts
33
Analysis by hospital category
39
Appendix: SILO’s targets
47
SILO IJ rel JSX performance
of 17 hospitals with 3,967 beds (capacity) spread across 13 of Indonesia’s
major cities. SILO’s hospitals are multi-specialty and provide a full range of
primary through quaternary care across a broad range of medical specialties.
The company is also in the early stages of an aggressive nationwide rollout of
hospitals that targets an expansion in the company’s hospital footprint to 40
hospitals with 10,000 beds by FY17E, spread across 25 Indonesian cities.
The company currently operates four “mature” hospitals; Lippo Village (SILO’s
flagship, established in 1996); Kebun Jeruk and Surabaya (acquired in 2002,
but first established in 1991 and 1977); and Lippo Cikarang (established in
2002). The balance of SILO’s hospitals are considered immature/developing,
although the majority were established or acquired in 2011–12 (with the
acquired hospitals first established in 2004–08), and are therefore mid- rather
than early-stage in their maturation. SILO’s Lippo Village facility achieved JCI
accreditation in 2007, but to date SILO’s other hospitals have not yet done so.
The company’s next largest competitors are Mitra Keluarga – owned by the
Kalbe Farma family (10 hospitals); Awal Bros (7 hospitals); and Sari Asih
Group (6 hospitals). Other notable competitors are Ramsay Sime Darby (3
hospitals), as well as regional hospitals in Singapore, Malaysia, and Thailand,
which are currently major beneficiaries of Indonesia-sourced medical tourism.
Source: FactSet, Macquarie Research, October 2014
Customer composition
Unlike in developed markets, where patients frequently visit their local (often
publicly funded) GP before seeking specialised care, in Indonesia, private
hospital customers typically proceed directly to hospitals to seek specialist
consultations. SILO’s business model is therefore actually a de facto hybrid
clinical and hospital model at present (although this is now slowly changing).
Approximately two-thirds of SILO’s patients are out-of-pocket patients, but
private insurance and government funded patients will likely grow in
significance over time, which will boost volumes but lower margins. About half
of SILO’s inpatient volumes are sourced from its outpatient department, and
the other half from its emergency department, which is a major focus for the
company (through the development of its private, nationwide 500-911
emergency number). Referral business remains negligibly small at present.
SILO’s current target market is primarily middle-upper income Indonesians, as
the high-end market typically travels abroad for medical care, while the lowerend market relies on public healthcare services (about 75% of Indonesians
are covered by government healthcare insurance, and this will be expanded
to 100% by 2019). In addition, SILO’s target market also includes high-income
Indonesians in need of emergency services. Longer term, SILO aspires to
service the full income range, however (as well as selective medical tourism).
Company history and background
SILO was established in 1996 as a JV between Gleneagles and a
predecessor entity to what later became LPKR. This JV established SILO’s
flagship Lippo Village facility. Following the onset of the Asian Financial Crisis,
the JV was dissolved. In 2002, Siloam acquired/established three additional
hospitals, and from 2011, commenced and aggressive expansion programme.
In mid 2013, LPKR spun-out SILO via IPO (priced at Rp9.0k), raising Rp1.4tr
in fresh capital, and diluting its stake to 86.5%. LPKR subsequently undertook
a placement of existing shares in early 2014, reducing its holding to 78.9%.
7 October 2014
2
Siloam Hospitals
Macquarie Research
Bridging the credibility gap: The bull case
Long term thematic supportive
On virtually any metric, Indonesia’s healthcare market appears considerably underserviced.
Healthcare spending is currently only about 3% of GDP, which is low not only by developed
world/OECD standards of c10% (the US should be excluded from analysis, as healthcare
spending is inflated by over-servicing due to litigation risk), but also relative to regional and
other lower-middle-income peers, which average closer to 4–5%. Furthermore, the number of
beds and doctors per capita is only circa 1/3rd and 1/10th, respectively, of DM averages, while
Indonesia’s life expectancy at birth – arguably the most all-encompassing measure of the
adequacy of domestic healthcare services, although rising, remains sub-optimal, at 71yrs.
Healthcare spending as a % of GDP
Fig 2
19.0%
20.0%
6.0
Doctors per 1,000ppl
Beds per 1,000ppl
4.9
5.0
16.0%
4.0
3.0
1.0
1.0
Source: WHO and IMF, Macquarie Research, October 2014
0.3
1.0
1.3
3.1
2.3
0.3
0.0
OECD av.
USA
DM average
UK
Malaysia
China
Singapore
India
Thailand
Indonesia
0.0%
0.7
2.8 2.8
1.8
Singapore
4.2%
1.5
China
4.0%
1.6
2.0
Malaysia
3.2%
2.2
2.0
5.7%
Thailand
3.0%
5.3%
India
8.0%
2.8
3.0
US
9.2%
UK
11.9%
12.0%
4.0%
Beds and doctors per 1,000 people
Indonesia
Fig 1
Source: Frost & Sullivan, Macquarie Research, October 2014
Internationally, growth in healthcare spending as a percentage of GDP has a well-established
relationship with growing levels of economic development (although demographics are also
vitally important). In addition, growth in Indonesian healthcare spending is likely to be given a
boost by the 2014–19 roll-out of universal public healthcare insurance (although 75% of the
population is already covered by various public healthcare schemes), as well Jokowi’s recent
election as Indonesia’s next president, given his stated intention to extend the public health
card policy he implemented as Jakarta governor to a nationwide policy.
In addition, while human capital constraints are a very real issue for the industry’s
development (see overleaf; we note that the under-penetration of physicians is much higher
than the number of hospital beds, indicating that this is the real market constraint), in the long
run (10–20 years), this is very likely a surmountable issue. It is difficult to find examples of
countries that have successfully developed and which have not, in the process, successfully
raised the level of domestic healthcare services, and Indonesia is unlikely to be an exception.
Siloam also has several important first-mover advantages
Moreover, SILO appears well placed to be at the forefront of the industry’s development. For
a start, the company is already the largest private hospital operator in Indonesia, and that
lead is likely to widen in coming years, given the company’s aggressive hospital roll-out
programme and its superior access to financing, due to its publicly-listed status and circa
US$1.5bn market cap. And investor demand for EM healthcare assets, coupled with a limited
range of domestic alternatives, and SILO’s existing highly-rated scrip, are likely to allow the
company to easily tap the equity market for additional financing as and when required.
In addition, we can identify multiple additional competitive/first-mover advantages:
Employer of choice: SILO’s state-of-the-art equipment, brand prominence, and scale, will
likely make it easier than average for SILO to attract the best domestic doctors. And being
an employer of choice could quickly become a major self-perpetuating advantage if it
enabled SILO to attract industry-leading medical specialist by offering them the opportunity
to work with other industry-leading people. SILO also has a partnership scheme in place
with UPH (Lippo’s education operations) to develop a pipeline of new doctors.
7 October 2014
3
Siloam Hospitals
Macquarie Research
License procurement: It requires 36 separate licenses in Indonesia to open a hospital – a
bureaucratic barrier to entry that is likely to advantage well-connected domestic business
groups (such as Lippo). In addition, there are some regulatory restrictions on foreign
participation (such as a 67% foreign ownership cap). This is likely to make it easier for
SILO to expand its hospital network in Indonesia than regional/international competitors.
Partnership with LPKR: SILO’s affiliation with the Lippo Group also confers on it further
advantages in the form of access to new sites; an ability to operate an “asset light” strategy
(with land and building development costs borne by LPKR); and LPKR’s willingness to
provide SILO’s upstart hospitals with rental subsidies for the first 3–4 years (as well as
bear some of the risk of low occupancy rates through variable rental arrangements).
An established brand: Unlike in more developed healthcare markets, it remains standard
practice in Indonesia for people seeking healthcare services to bypass a clinical GP
consultation and proceed directly to a specialist located at a hospital (which is generally
thought to be due to the low level of faith placed in the quality of GP advice).
Consequently, SILO’s referral business remains minimal, and SILO relies heavily on “walkin” traffic. This renders brand prominence of much greater importance than in many
developed hospital markets. While this operating model persists (and it is already slowly
changing), having an established brand is likely to be significant asset in attracting
increased patient volume.
Nationwide emergency number: Indonesia currently has no nationwide public “911”
emergency number. Consequently, SILO is promoting its private 500-911 number, and is
the only healthcare provider to be rolling this out such a number on a national scale
(although several competing operators have regional numbers). If consumer mindshare of
this number is achieved, this could become an important asset over time – particularly
given that c50% of SILO’s inpatient volumes driven are by its emergency department.
Fig 3
Trend in Indonesian hospital numbers
2,000
Public
Private
Fig 4
Player
599 for profit;
724 not-for-profit
1,725
1,750
1,608
1,500
1,250
1,000
1,202
1,295
1,372
815
535
591
915
634
750
500
250
667
704
738
793
810
2009
2010
2011
2012
2013
0
Source: MoH, Macquarie Research, October 2014,
List of major private hospital operators (est.)
Hospitals
Siloam
Mitra Keluarga
Aw al Bros
Ramsay Sime Darby
Omni Hospital
Mayapada
KPJ Healthcare
Ciputra Hospitals
Pakuw on Jati & Elang Mahkota
Other for-profit private hospitals
Total for-profit hospitals
% of total
17
10
8
3
2
2
2
1
1
553
599
2.8%
1.7%
1.3%
0.5%
0.3%
0.3%
0.3%
0.2%
0.2%
92.3%
100.0%
Source: Various sources, Macquarie Research, October 2014
Acquisitions/industry consolidation a major opportunity
In addition, Indonesia’s private hospital industry remains highly fragmented. Consequently,
there are likely to be significant acquisition opportunities for the larger players over time –
particularly those with superior access to capital and an ability to leverage “network”
advantages, such as including acquired hospitals within the company’s brand network, and
leveraging superior bargaining power with equipment and pharmaceutical suppliers.
Amongst SILO’s existing hospitals, 7 were acquired by acquisition, and only 10 established
organically, and 2 of these 7 acquisitions also occurred as recently as December 2013 (two
BIMC branded Bali-based hospitals) – albeit that the size was small (a combined 50 beds,
acquired for US$26m). Opportunistic bolt-on acquisitions could complement SILO’s rapid
organic expansion programme, and will be aided meaningfully by its ability to fund
acquisitions through its highly-rated scrip (which likely offers the company the lowest cost of
equity in the industry), and (for the moment) debt-free balance sheet post the company’s IPO.
7 October 2014
4
Siloam Hospitals
Macquarie Research
Private hospital assets are highly rated – especially market leaders,
and especially in emerging/ASEAN markets
Market-leading private hospital operators generally have robust businesses characterised by
(1) defensive cash flows; (2) high levels of free cash flow generation; (3) GDP+ growth
profiles, aided by aging populations in many markets, and above-average growth in careintensive non-communicable diseases; and (4) the ability to expand margins over time
through improving occupancy; brownfield expansions; and pricing (particularly in emerging
markets where out-of-pocket patients are a larger share of a hospital’s payer mix).
In addition, incremental greenfield and acquisitive-based expansion typically augments
overall growth rates, resulting solid, consistent growth, coupled with high returns on capital.
Consequently, well-run private hospital assets are generally highly rated, and in the
developed world generally trade at above-market multiples of 20–25x earnings.
Furthermore, in EMs (and especially emerging Asia at present), multiples are higher still –
generally 30–50x. This latter multiple premium reflects not only the superior growth prospects
these markets are seen to offer, but also the fact that margins are generally higher, owing to
more limited competition, and a greater percentage of customers being out-of-pocket payers
with limited bargaining power (as compared to private insurance or government patients).
In addition, we cannot help but notice that the long term share price charts for regional private
hospital operators – almost without exception – seem to go from the bottom left to the top
right (Fig 5), albeit aided by multiple expansion in recent years. Prima facie, shorting a stock
like SILO therefore appears to be a risky proposition.
Share price performance of regional hospitals
Rebased
60.0x
Bangkok Dusit
40.7x
Raffles
40.0x
Ramsay
800
52.3x
50.0x
Bumrungrad
1,000
Current PER multiples – regional comps (T+1)
38.9x
36.6x
35.5x
32.8x
31.2x
Raffles Medical
1,200
Fig 6
KPJ
Fig 5
30.0x
600
20.0x
400
10.0x
200
Bumrungrad
Bangkok Chain
Bangkok Dusit
Apollo
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Source: Bloomberg, Macquarie Research, October 2014
IHH
0.0x
0
Source: Bloomberg (6 Oct 2014), Macquarie Research, October 2014
Exceptions exist, however. Margins and returns on capital for hospital operators in developed
markets who rely heavily on government-funded patients – particularly in markets where the
relevant government’s finances are under pressure and reimbursement rates to healthcare
providers are being cut (such as in some European economies at present) – are much lower
(and are falling). In addition, economic returns earned by sub-scale operators, as opposed to
the best-in-class operators which are typically listed, are also frequently substandard.
However, Indonesia’s healthcare market is unlikely to demonstrate these characteristics for a
long time, and SILO is likely to be amongst the market leaders rather than a sub-scale player.
7 October 2014
5
Siloam Hospitals
Macquarie Research
Significant upside if its expansion plans can be delivered: A
plausible valuation case still exists for SILO at current levels
Lastly, despite SILO’s very high multiples of current earnings, a plausible valuation-driven bull
case still exists. The immediate “elephant in the room” to address is SILO’s extremely high
PER of current earnings. It is important to emphasise that the nature of hospital assets is that
newly-established hospitals typically have long gestation periods and book losses in early
years, but if successfully run, generally become highly profitable and cash generative in later
years. A PER-based approach will therefore tend to undervalue hospital operators with a
significant number of immature hospitals, and SILO is just such an operator at present.
At present, only 4 of SILO’s 17 hospitals are categorized as “mature” by the company, and
Fig 7 highlights that the combined revenues of these facilities was running at an annualised
rate of about Rp1.6tr in 1H14A (US$133m), or an average of about US$33.2m per hospital
(although only US$24.2m excluding the large revenues booked by SILO’s flagship Lippo
Village facility). Meanwhile, operating margins averaged 13.4% in 1H14A (EBITDA margins
16.6%). Valued at a 30x unlevered PER (SILO has no net debt at present), these facilities
alone would be worth US$400m, or slightly more than Rp4,000 per share (we discuss the
appropriateness of a 30x multiple in our valuation section).
Meanwhile, the company’s 13 immature/developing hospitals are generating combined
revenues of only about the same amount (and only about US$9.9m per hospital, or about
70% less than SILO’s mature hospitals on average), and delivering negative operating
margins of –4.1% (although positive 9.1% margin at the EBITDA level). Depreciation is much
higher for these facilities relative to sales (13.2%) due to their relatively low revenue bases
(absolute depreciation is US$1.3m per facility vs. US$1.1m for mature facilities – higher due
to the more recent acquisition of equipment at less favourable exchange rates).
Fig 7
Summary of SILO’s mature vs. immature hospital portfolio
Rp bn
Mature
Immature/devel.
Combined
No. of hospitals
No. of beds (capacity)
Average hospital size (beds)
Annualised revenues (1H14A)
EBITDA margins (1H14A)
EBITDA
Depreciation to sales (1H14A)
Operating margins (1H14A)
Operating profit (1H14A annualised)
NOPAT (25% pro forma)
4
867
217
1,594
16.6%
265
3.2%
13.4%
213
160
13
3,100
238
1,541
9.1%
141
13.2%
-4.1%
-63
-47
17
3,967
233
3,136
12.9%
406
8.2%
4.8%
150
113
Average revenue per hospital (US$m)
Average revenue per bed (US$ '000)
Average depreciation per facility (US$m)
$33.2
$153.2
$1.1
$9.9
$41.4
$1.3
$15.4
$65.9
$1.3
Assumed mature state for immature
Revenue per hospital
EBITDA margins
Depreciation to sales ($1.3m/$24.2m)
Operating margins
NOPAT (Rp bn)
$24.2
16.6%
5.4%
11.2%
317
Mature earnings (Rp bn)
EPS (Rp)
PER multiple
Valuation (Rp bn)
Valuation (US$m)
Value per share (Rp)
160
138
30.0x
4,800
$400.0
4,152
317
274
30.0x
9,508
$792.3
8,224
477
413
30.0x
14,308
$1,192.3
12,376
PER at current price
109.8x
55.4x
36.8x
Source: Macquarie Research, October 2014, *US$24.2m excluding SILO’s Lippo Village flagship.
7 October 2014
6
Siloam Hospitals
Macquarie Research
If these facilities were to eventually achieve US$24.2m in revenues per facility (the same as
the amount being booked by SILO’s mature hospitals excluding Lippo Village); enjoy 16.6%
EBITDA margins (on par with SILO’s current mature hospitals); and operating margins of
11.2% (based on US$1.3m pa in depreciation per facility), valued at 30x, they would add an
additional Rp8,200 to SILO’s valuation, and lower SILO’s combined PER at Rp15,200 to only
36.8x – a level that is more broadly on par with regional comps at present.
This also excludes the upside from new hospitals
In addition to the above, SILO has 23–29 new organic hospital in the pipeline, 23 of which are
targeted for opening by FY17E (although delays are quite possible). As discussed in our
valuation section, a swift profitability ramp up in these facilities could add as much as
US$35m in NPV per new hospital, suggesting scope for the addition value accretion of
US$700–800m from this hospital pipeline. This would bring SILO’s combined value to closer
to Rp20k per share. In addition, further hospital openings post FY17–20E are likely.
However, this new-hospital-NPV is highly sensitive to the pace of occupancy ramp-up, and as
we discuss in the following section, we believe the ramp-up will be slower than targeted. In
addition, it is important to emphasise that in the case of SILO’s new hospitals, it has not yet
incurred the necessarily establishment capex (which is expected to average about US$15m
per facility). This capex, which in the aggregate will likely exceed US$300m, will also be 20–
30% higher in rupiah terms vs. the time of SILO’s IPO due the intervening depreciation of the
rupiah (something the market appears to have overlooked). The value accretion of these
hospitals will therefore be significantly less the current value of SILO’s existing hospitals.
Nevertheless, SILO’s hospital roll-out pipeline also offers additional blue sky and potentially
very attractive long term growth options, if attractive ROICs can be achieved. Our base case
SOTH (“sum of the hospitals”) valuation, which we discuss later in the report, includes an
average NPV accretion of US$20m per hospital across SILO’s 23-hospital pipeline (Fig 8).
Fig 8
Our SOTH (“sum of the hospitals”) valuation*
Hospital category
Method
US$m
Rp bn
Per share (Rp)
Mature hospitals
Immature hospitals
Future hospitals
Net cash/(debt)
Total
30x PER FY14E earnings
30x FY20E discounted to PV @ 10%
US$20m per hospital x 23; PVed at 10%
2Q14A BV
$430
$593
$388
$1
$1,412
5,163
7,111
4,656
13
16,943
4,466
6,151
4,027
11
14,656
Source: Macquarie Research, October 2014, *Please refer to our valuation section for a more detailed discussion.
7 October 2014
7
Siloam Hospitals
Macquarie Research
SILO’s market cap is small relative to its regional peers
Further supporting the valuation case for SILO is the fact that – despite the company’s
elevated multiples at present – the company’s market capitalisation of cUS$1.5bn remains
significantly below several regional peers – notably its Thai peers. This would seem to imply
the capacity for significant further long term upside. In addition, the company’s multiples on
an EV/bed or EV/hospital basis also comparatively low (at least in relative terms; it is possible
that hospital assets in the aggregate are overvalued in Asia at the moment).
We note, however, that (1) SILO’s average bed utilisation is much lower than its peers; (2)
that SILO has a significantly less-developed business, with service standards well below its
peer group; and (3) that these comps have a significantly higher quantity of capital deployed
(which often took decades to accumulate), and in many cases own rather than lease the
relevant hospital premises (which should support a significantly higher EV/bed valuation
multiple vs. leased facilities). These comparative metrics may therefore overstate the upside.
Nevertheless, they do point to the existence of significant room for future value creation.
Fig 9
Market capitalisations of regional peers
Fig 10
Comparative EVs per hospital bed
US$'000
$7,000
$12,393
$6,000
$12,000
$5,000
$3,000
$4,000
$2,859
$2,000
$2,511
$1,744
$2,000
$2,839
$1,440
$1,217
$883
$753
$1,518
$1,000
$594
$453
$428
$398
$363
Siloam
$6,000
Apollo
$4,000
Bangkok Chain
$8,000
KPJ
$8,689
Fortis
$10,000
$5,825
7 October 2014
Bangkok Dusit
Bangkok Chain
Fortis
KPJ
Siloam
Raffles Medical
Apollo
Bumrungrad
Bangkok Dusit
IHH
Source: Bloomberg, Macquarie Research, October 2014
Bumrungrad
$0
$0
IHH
$14,000
Source: Company data, Bloomberg, Macquarie Research, October 2014
8
Siloam Hospitals
Macquarie Research
The bear case: So why the Neutral?
So given the foregoing, why only the Neutral recommendation? The short answer is that we
believe it is likely that SILO’s new hospital profitability ramp-up will be much slower than
targeted (SILO is targeting US$25m in revenue, and 18–20% EBITDA margins, within four
years – see our appendix), and that investors are also likely underestimating the medium
term execution and earnings risks associated with SILO’s aggressive hospital roll-out.
The various risks we discuss in more detail below, which we believe the market may be
insufficiently acquainted with, include the following:
Overexpansion risk: New hospitals have long gestations periods, and investing in
expensive and rapidly-depreciating medical equipment too far ahead of future demand can
result in poor return on capital outcomes, even if occupancy does eventually rise. We
discuss also how SILO’s occupancy rate is already low and declining, and so the
company’s aggressive expansion plans depend on healthcare spending inflecting upwards.
Healthcare spending rising more slowly than expected: We believe this risk is real,
due to demographic; affordability; and quality constraints, and note that most of the
inflection in healthcare spending as a percentage of GDP appears to occur at high levels of
income that are far above Indonesia’s present level of GDP per capita. Competition from
regional medical tourism hubs is also likely continue to pressure the domestic healthcare
industry, while Indonesia’s economy slowing economy also poses additional challenges.
Finally, the accretion to market demand from Indonesia’s roll-out of universal healthcare
could be less than expected, due to c75% of the population already being covered.
Doctors the key bottleneck; not facilities: The primary constraint on the upgrading of
domestic healthcare services is not the availability of hospital facilities, but the availability
of skilled personnel – a bottleneck that could require decades to redress – and the
associated risk that that Indonesia’s pace of hospital build outpaces human capital
upgrading, driving inflation in doctor compensation and pressuring hospital margins.
Inappropriate use of comps: Finally, we believe SILO’s business model and margin
prospects are not comparable to the elite group of listed regional hospital companies SILO
is frequently compared with, who offer genuinely world class services; service the high-end
market; and who benefit from significant inflows of medical tourism. In addition, we
highlight how SILO’s EBITDA margins are also not directly comparable to regional peers,
due to its capital light rental model, and inclusion of doctor service fees in its top line.
In the very long term, we are bullish on SILO’s prospects, and believe these challenges can
be overcome. However, the issue with long-term thematic stories is often not the long run but
rather the short run – particularly when starting valuations are high. Indeed, we find it
something of a delicious irony that bull cases for the stock are premised on 20-yr supportive
thematics when the holding periods of most investors continues to shorten and is generally
less than 24–36mths. We believe a better entry point is likely to present itself along the way.
New hospitals have long gestation, introducing overexpansion risks
In contrast to the typical incremental, measured approach to expansion adopted by hospital
operators, SILO is adopting a “foot to the floor” approach, and aiming to essentially triple its
hospital network in five years, from 13 hospitals in April 2013 to 40 by FY17E. This is one of
the most aggressive hospital roll-out stories we can identify globally.
This strategy is not without risk. One of the reasons hospital operators typically adopt a
measured, incrementalist approach to growth is that new hospitals are (1) highly capital
intensive to establish; and (2) typically have long gestation periods of five years or more,
before profitability reaches acceptable levels. These long gestation periods reflect the fact
that healthcare services are a highly relationship-driven business, and that it therefore takes a
long time for relationships with patients and GP referral networks to develop, and for new
hospitals to become integrated into a given community. Consequently, aggressive expansion
carries the risk of mushrooming operating losses (and capital demands).
7 October 2014
9
Siloam Hospitals
Macquarie Research
Mayapada’s experience highlights the risk of overinvestment
One of the clearest examples of the impact of over-expansion is SILO’s IDX-listed hospital
peer SRAJ (Not Rated), which operates two Mayapada-branded hospitals. Mayapada
acquired its first hospital in 2008 (which was originally opened in 1995, and therefore already
mature and well established), and until late 2013, the company was quite profitable. However,
in late 2013, the company opened a new upscale facility in South Jakarta, and since that
time, the company has suffered huge losses, as rates of utilisation have disappointed.
Fig 11
Trend in Mayapada margins
Fig 12
Trend in Mayapada revenues
Rp bn
30.0%
20.0%
26.5%
23.4%
14.8%
23.7%
14.4%
12.2%
14.4%
221
16.3%
195
200
9.3%
8.6%
10.0%
22.3%
250
176
167
5.1%
149
150
0.0%
106
-3.3%
EBITDA margins
-10.0%
116
100
Depreciation to sales
-20.0%
Operating margins
-17.1%
-19.5%
-30.0%
FY10a
FY11a
FY12a
FY13a
1H14a
Source: SRAJ Company data, Macquarie Research, October 2014
50
0
FY10a
FY11a
FY12a
FY13a
1H13a
2H13a
1H14a
Source: SRAJ Company data, Macquarie Research, October 2014
We have visited the facility, and to the naked eye, it seems very impressive, and sports all the
latest state-of-the-art equipment. However, looks can be deceptive, and Mayapada’s P&L
highlights that the “build it and they will come” approach to expansion will not necessarily
work, despite the apparent vast under-servicing of the domestic market.
Mayapada’s experience appears to partly reflect company-specific execution issues, and the
company having made the mistake of targeting its hospitals too much to the high end (as this
market travels overseas), and its losses are far above those typically being booked by SILO
on its upstart hospitals. Nevertheless, Mayapada’s experience does serve to highlight (1) the
risks/costs of investing too far ahead of future demand; and (2) that the major constraint on
the development of world class healthcare services in Indonesia is not a scarcity of facilities
or equipment, but rather the inability to staff them with sufficiently well-trained doctors.
Furthermore, because the bulk of upfront capex is committed to the acquisition of advanced
medical equipment, which owing to the rapid pace of innovation in medical device technology
tends to age/depreciate rapidly, the economic cost of overexpansion can be high, and result
in extended periods of losses/poor returns on capital. As we discuss in our valuation section,
the sensitivity of the NPV of new hospital openings to the pace of ramp-up is significant, and
extended lead-times on the ramp-up of new facilities can quickly reduce their NPV to zero.
SILO’s occupancy rates are already low and falling
Notable is that since the commencement of SILO’s rapid hospital roll-out programme in 2011,
SILO’s occupancy rates (and hence profitability) has been falling, from 44.8% in FY11A, to an
estimated 28.8% in FY13A. This improved slightly to an estimated 32.9% in 1H14A, due to
the delayed opening of new hospitals, and the contribution from SILO’s two BIMC Bali
hospital acquisitions in late 2013, but we expect occupancy rates to come under renewed
pressure as new hospital additions ramp up from late 2014. SILO’s aggressive hospital rollout plan is therefore coming at a time when occupancy rates are already low and falling.
We note that SILO calculated its occupancy rates in its IPO prospectus on the basis of
operational beds, whereas we are using total hospital bed capacity (i.e. the number of beds
SILO’s hospital are designed to accommodate). At the time of SILO’s IPO, its operational
beds were only 49.6% of capacity. However, we believe SILO’s approach acts to significantly
overstate capacity utilisation, as the incremental capex and addition to overall hospital fixed
costs of bringing new beds into capacity is relatively minimal.
7 October 2014
10
Siloam Hospitals
Macquarie Research
Furthermore, while the company’s EBITDA margins have remained relatively stable in recent
years at about 11% (although they increased to 14.7% in 1Q14A, before declining to 12.0% in
2Q14A),1 its operating (i.e. EBIT) margins have been falling, due to escalating depreciation
charges alongside the rapid capacity additions SILO has instituted. And it is in this line item
that the cost of SILO’s declining occupancy levels can be clearly observed.
Fig 13
Trend in occupancy rate (vs. bed capacity)
Fig 14
Trend in SILO’s EBITDA/operating margins
EBITDA margins
50.0%
14.0%
44.8%
45.0%
35.0%
32.9%
31.6%
13.3%
11.2%
11.1%
11.0%
9.8%
10.0%
28.8%
30.0%
EBIT margins
12.9%
12.0%
40.0%
Depreciation-to-sales
8.2%
8.1%
8.0%
7.0%
6.7%
25.0%
20.0%
6.0%
15.0%
4.0%
5.1%
4.3%
4.1%
3.1%
3.0%
10.0%
2.0%
5.0%
0.0%
0.0%
FY11a
FY12a
FY13a
1H14a
Source: Company data, Macquarie Research, October 2014
FY10a
FY11a
FY12a
FY13a
1H14a
Source: Company data, Macquarie Research, October 2014
The company encourages the market to focus on EBITDA, where SILO’s margin and
earnings trend appears more encouraging. However, in SILO’s case, we believe depreciation
is a fundamentally important and very real expense category, as maintaining state-of-the-art
equipment is core to SILO’s operating model, and such equipment needs to be upgraded
from time-to-time to stay abreast of the latest technological trends. Poor utilisation rates
during equipment lifecycles therefore represent a real loss to SILO.
SILO also downplays the extent of ongoing maintenance capex demands, but it is notable
that SILO’s mature hospitals have seen maintenance capex routinely exceed depreciation
costs in recent years (Fig 15) – something that will likely continue to be the case over time
due to Indonesia’s high inflation rate.2 Consequently, not only is depreciation a real expense,
but it actually understates ongoing cash demands (on a long term basis).
Fig 15
Capex vs. depreciation on mature facilities
Fig 16
Rp bn
Rp bn
90
300
82.9
Capex
80
62.8
278
EBITDA (numbers on top)
208
197
60
200
50.9
202
45.4
50
40
Operating profits
Depreciation
Depreciation
250
70
SILO EBIT, depreciation, and EBITDA trend
150
38.2
32.0
30
27.9
29.7
29.2
25.9
133
141
133
120
32
100
128
52
90
20
50
101
10
89
77
80
76
43
0
0
FY10a
FY11a
FY12a
FY13a
Source: Company data, Macquarie Research, October 2014
1H14a
FY10a
FY11a
FY12a
FY13a
1H13a
1H14a
Source: Company data, Macquarie Research, October 2014
1
We note that SILO’s FY10–13A EBITDA margins shown in Fig 13 is below what was outlined in SILO’s
prospectus and its presentation materials. This is because SILO’s definition of EBITDA previously excluded
several cost items, such as provisions for post-employment employee entitlements, which we consider to be a
genuine expense categories which have no justification for being excluded from EBITDA. However, we note
that SILO’s treatment in 1H14A has since normalised to reflect the methodology we are using.
2
7 October 2014
Excludes Lippo Cikarang in FY11A and FY12A due to a lack of disclosure by SILO.
11
Siloam Hospitals
Macquarie Research
Also notable is the fact that in the pre-IPO period, SILO’s funding costs were being carried by
LPKR via the provision of interest-free inter-company loans. No such luxury will be available
with respect to future capex, which is likely to exceed US$300m over the next 3–4yrs
(although this may be partly equity funded). Funding costs in Indonesia are high at the
moment (typically double-digit), and SILO’s ROE is already only c5%. Rapidly rising
depreciation and funding costs, coupled with at best break even EBITDA outcomes on new
hospital openings, could quickly push SILO into loss-making territory.
Cannibalisation risk exists
In addition, it is noteworthy that SILO’s mature hospitals experienced a sharp slowdown in
revenue growth during 1H14A, to 5.6% YoY in 1Q14A, and to 7.4% YoY in 2Q14A – rates of
growth that are only, at best, marginally above Indonesia’s CPI. The aggregate number of
OPD and IPD visits to SILO’s mature hospitals was also roughly flat YoY in 1H14A. This likely
contributed to the decline in mature hospital EBITDA margins to 16.6% in 1H14A, from 19.0%
in the pcp, as hospital level cost inflation is likely running above the pace of CPI.3
While a slowing economy has likely contributed, it is also possible that this slowdown partly
reflects growing cannibalisation from SILO’s newer hospitals, and this cannibalisation impact
might increase in coming years. Notable is that SILO expects to add an additional 23
hospitals between now and FY17E, but only intends to increase the number of cities in which
it is present from 13 to 25. By implication, that means that approximately half of these new
openings will be in cities that already have a SILO hospital facility (see Fig 17).
Fig 17
SILO’s hospital footprint and expansion plans by geography
Source: SILO 2Q14A investor presentation, Macquarie Research, October 2014
Healthcare spending may ramp up more slowly than expected
SILO’s rapid capacity addition plan, despite its existing low and declining occupancy rates,
appears to represent an implicit bet that Indonesian private healthcare demand is set for a
very sharp upward inflection in coming years. And given the under-serviced nature of
Indonesia’s healthcare industry, many might quite reasonably argue that the risk of
overexpansion is limited. And the bulls might well be proven right. Nevertheless, we believe
the risk needs to be explored, because SILO’s share price appears to be pricing in the said
inflection, and we believe the risks are higher than the market (and SILO) believes.
3
SILO attributed the decline in mature hospital profitability to the expiry of rental free terms granted by LPKR
to SILO in the pre-IPO period (up to May 2013). However, it is notable that SILO’s mature hospital profitability
also fell sharply HoH in 1H14A and QoQ in 2Q14A as well.
7 October 2014
12
Siloam Hospitals
Macquarie Research
While analysts frequently highlight the fact that healthcare spending in Indonesia remains low
by international standards, the reasons why this is the case are seldom explored, and we
believe the market is actually underserviced for good reason:
Demographics: Healthcare spending is highly correlated with the size of the elderly
population – a fact that is demonstrated amply by Fig 19 – and Indonesia’s population is
young, with a median age of just 29yrs. Furthermore, in general, high income countries
have much older average populations (Fig 18). The difference in spending as a percentage
of GDP may therefore have as much to do with demographics as income levels.
Fig 18
Demographic profile
Fig 19
25%
45
22%
% of population >60yo
35
30
15%
$25,961
$25,000
$20,000
$16,389
25
12%
10%
$30,000
40
Median age (RHS)
20%
US annual hospital spend per capita (2004)
8%
8%
20
15
6%
$15,000
$10,778
$10,000
$7,787
10
5%
5
0%
$5,210
$5,000
$3,370
$2,650
0
Lower
income
Lower-middle Upper-middle High income
income
income
Indonesia
$0
0-18
Source: WHO Health Statistics, Macquarie Research, October 2014
19-44
45-54
55-64
65-74
75-84
85+
Source: US hospital industry report, Macquarie Research, October 2014
Affordability: The vast bulk of the Indonesian population cannot afford the type of private
hospital services SILO provides, and are forced to rely on public healthcare services, and
while public spending has been rising, it has remained constrained by Indonesia’s low
GDP per capita; low tax-to-GDP ratio; and wasteful use of fiscal resources. Economic
growth will drive rising affordability over time, but the process is inherently slow, and for the
time being, the outlook for Indonesia’s economic growth is rapidly deteriorating.
Quality deficiencies, driven by the low quality of domestic doctors: This constraint
has the effect of limiting the perceived “value for money” of expensive domestic private
healthcare services (vs. public services), and driving large and growing outflows of medical
tourists to competing regional markets such as Singapore, Malaysia, and Thailand.
None of these factors – perhaps barring the outlook for government spending on healthcare
(see below) – looks set to change rapidly. Furthermore, also seldom pointed out is the fact
that Indonesia’s healthcare spending as a percentage of GDP has actually been flat for
almost a decade (Fig 20), in spite of a booming economy and the putative vast level of market
under-servicing (which is to some extent inconsistent with SILO’s low occupancy rates).
Fig 20
Indonesian healthcare spending to GDP
Trending relatively flat
4.0%
Public
2000
2.8%
2.5%
2.8%
2.8%
1.7%
1.7%
9.8%
10.0%
2.9%
2.4%
8.0%
1.9%
1.5%
1.4%
1.9%
1.9%
1.8%
1.8%
1.8%
5.4%
5.2%
6.0%
4.0%
1.4%
5.8%
4.1% 4.4%
4.0%
1.0%
0.5%
11.9%
3.0%
2.9%
2.2%
2.0%
1.5%
2.9%
2011
12.0%
3.1%
3.0%
Change in spending by group: 2000–11
14.0%
Private
3.5%
2.5%
Fig 21
2.0%
0.8%
1.0%
1.0%
0.9%
1.0%
1.2%
1.1%
1.1%
1.1%
0.9%
1.2%
0.0%
Low income
0.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: WHO, Macquarie Research, October 2014
7 October 2014
Lower-middle
income
Upper-middle
income
High income
Source: WHO Health Statistics, Macquarie Research, October 2014
13
Siloam Hospitals
Macquarie Research
Indonesia’s experience does not seem unique in this regard, as according to the WHO lowermiddle and upper-middle income countries in the aggregate only experienced a 30–40bp
increase healthcare spending as a percentage of GDP in the 11 years to FY11A (which was a
decade that was an economic boon for emerging countries). Furthermore, the gap in
healthcare spending between lower-middle and upper-middle income countries (Indonesia is
part of the “lower-middle income” group in WHO’s statistics) is not particularly large (Fig 21).
Furthermore, life expectancies – arguably the most all-encompassing measure of the
adequacy of healthcare services – have been rising rapidly in most markets, with the average
life expectancy in low, lower-middle, and upper-middle income countries increased from 53 to
62yrs; 59 to 66yrs; and 68 to 74yrs, respectively, during 2000-11 – a trend which is
inconsistent with the putative vast level of market under-servicing in these regions.
Furthermore, in Indonesia, it rose from 62yrs to 71yrs – outperforming its peer group.
In addition, Fig 21 highlights that where the most rapid increases in healthcare spending
occur is in the high echelons of incomes, and it is notable that the vast majority of the OECD
countries that comprise this group have (1) very different demographic profiles to Indonesia
(i.e. rapidly aging populations); and (2) extremely well-developed and funded public
healthcare systems, reflecting the wealthy status of these nations.
Lastly, Indonesia’s economy is in the midst of a rapid economic slowdown at present, as it
comes out of a commodity- and liquidity-fuelled economic boom, the supporting conditions of
which are now rapidly receding. Slowing economic growth is also likely to significantly
dampen the pace of increased demand for private hospital services.
Boost to demand from UHC may be less than expected
We believe it is likely that the roll-out of universal healthcare (UHC) will accelerate healthcare
spending growth in Indonesia, and will likely benefit private hospital operators via the
“crowding out” effect of overburdening public healthcare resources, thereby driving a forced
upgrading to private services (which appears to have occurred in Thailand post the 2002
implementation of UHC). In addition, an increase in government-funded referral business is
likely. However, the demand accretion may be less than is presently expected, as:
As at 2011–12, an estimated 151.5m Indonesians were already covered by some form of
health insurance (Fig 22), representing approximately 60–65% of Indonesian’s population,
and MoH data indicates that this coverage had increased further to 181.3m people as of
2013, or 76.2% of the population (based on the 238m population base used by the MoH,
which is likely slightly understated). This rate of penetration has likely increased further
during 2014, and the full roll-out to 100% is expected to occur only gradually, by 2019. The
boost to demand will therefore be incremental in nature, rather than a step change.
Owing to very low quality standards in existing public healthcare services, those that can
afford private healthcare have likely already upgraded where possible.
The roll-out in universal healthcare is expected to be accompanied by a significant l
INDONESIA
Bridging the credibility gap
Initiating with a Neutral recommendation; prefer LPKR
We initiate coverage of SILO with a Neutral recommendation and Rp15.0k
valuation and PT. We believe SILO is well placed to become Indonesia’s
preeminent private hospital operator, and be at the forefront of the long term
development of Indonesia’s underserviced healthcare sector.
However, the company’s valuation metrics are already very high, and appear to
anticipate the seamless delivery of the company’s aggressive growth targets,
whereas we believe medium term execution risks are much higher than the
market currently perceives, and that SILO’s guidance on the timeframes for the
ramp-up of its immature/new hospitals’ profitability is too aggressive. The stock
has also already rallied 60% this year despite relatively-weak 1Q–2Q14A results.
SILO IJ
Price (at 06:56, 06 Oct 2014 GMT)
Neutral
Rp15,200
Valuation
Rp
15,000
- DDM
We therefore believe now may not be the optimal entry-point. In the meantime,
we believe a vastly superior way to play the story is through SILO’s listed parent
LPKR, given that at-market, LPKR’s 78.9% stake represents 66.0% of LPKR’s
market cap, despite SILO’s minimal contribution to LPKR’s earnings at present.
A wide open opportunity – long term
12-month target
Rp
15,000
Upside/Downside
%
-1.3
12-month TSR
%
-1.3
Volatility Index
Low/Medium
GICS sector
Health Care Equipment & Services
Market cap
Rpbn
17,571
Market cap
US$m
1,410
Free float
%
100
30-day avg turnover
US$m
6.8
Number shares on issue
m
1,156
Indonesia’s healthcare sector remains significantly underdeveloped, with
healthcare spending currently sitting at just 3% of GDP, vs. 4–5% for regional
peers, and DM averages of c10%. A contributing factor has been a significant
deficit in the quality of available domestic healthcare services, which has caused
affluent Indonesians to seek medical care abroad. Any successful elevation of
domestic healthcare standards towards international norms therefore represents
a major opportunity. Furthermore, SILO stands a good chance of being a leading
player in driving this upgrading, given its scale, access to funding, brand,
preferential access to sites/rental terms, and other first-mover advantages.
Investment fundamentals
SILO’s FY14E PER is an exceptionally high c200x. However, we discuss how
this is overstated by the presence of a number of immature hospitals in SILO’s
portfolio, which generally book losses in early years. Considering the profitability
of its 4 mature hospitals alone, the stock is trading on a PER of about 110x, and
this multiple would drop to only 37x if SILO’s 13 immature hospitals were
eventually able to achieve the similar per-hospital profitability as SILO’s mature
hospitals. In addition, the company has another 23–29 hospitals in the pipeline.
Year end 31 Dec
Revenue
EBIT
EBIT growth
Reported profit
Adjusted profit
EPS rep
EPS rep growth
EPS adj
EPS adj growth
PER rep
PER adj
Total DPS
Total div yield
ROA
ROE
EV/EBITDA
Net debt/equity
P/BV
2013A 2014E 2015E 2016E
bn 2,503.6 3,335.9 4,256.0 5,676.7
bn
74.2 169.6 206.5 239.8
%
nmf 128.6
21.8
16.1
bn
49.9
87.1
83.2
63.6
bn
49.9
87.1
83.2
63.6
Rp
47.4
75.3
72.0
55.0
%
nmf
58.9
-4.5 -23.6
Rp
45.9
75.3
72.0
55.0
%
nmf
64.0
-4.5 -23.6
x 320.7 201.8 211.2 276.3
x 330.8 201.8 211.2 276.3
Rp
0.0
7.5
7.2
8.3
%
0.0
0.0
0.0
0.1
%
2.9
6.1
6.1
5.6
%
3.1
5.3
4.8
3.5
x
63.1
39.7
31.5
25.2
%
-4.2
6.1
44.7
80.3
x
10.9
10.3
9.9
9.6
Source: FactSet, Macquarie Research, October 2014
(all figures in IDR unless noted)
Analyst(s)
Lyall Taylor
+62 21 2598 8489
lyall.taylor@macquarie.com
7 October 2014
PT Macquarie Capital Securities
Indonesia
Valuation expensive, but not as high as it looks
However, execution and overexpansion risks are high
However, while the opportunity is considerable longer term, the risk with long
term thematics is often not the long term but the short term. Healthcare spending
as a percentage of GDP has actually been relatively flat in recent years, and the
major industry bottleneck at present is not the availability of facilities, but the
limited availability of quality doctors, where standards remain far below
international norms. This human capital upgrading will likely be a very slow
process, and in the meantime, Indonesia will likely remain uncompetitive with
regional peers, and suffer a growing deficit in the medical tourism trade.
In addition, new hospitals are highly capital intensive and usually require years of
gestation losses, and we see significant risks of SILO’s aggressive hospital rollout programme resulting in a below-expectation ramp-up in occupancy rates and
profitability, which could drive escalating losses and FCF deficits medium term.
Please refer to page 51 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Siloam Hospitals
Macquarie Research
Inside
Company profile
Bridging the credibility gap: The bull case 3
Hospital footprint
The bear case: So why the Neutral?
SILO is currently Indonesia’s largest private hospital operator, with a portfolio
9
Valuation
19
Risk analysis
23
Company profile and operations
26
Summary of our earnings forecasts
33
Analysis by hospital category
39
Appendix: SILO’s targets
47
SILO IJ rel JSX performance
of 17 hospitals with 3,967 beds (capacity) spread across 13 of Indonesia’s
major cities. SILO’s hospitals are multi-specialty and provide a full range of
primary through quaternary care across a broad range of medical specialties.
The company is also in the early stages of an aggressive nationwide rollout of
hospitals that targets an expansion in the company’s hospital footprint to 40
hospitals with 10,000 beds by FY17E, spread across 25 Indonesian cities.
The company currently operates four “mature” hospitals; Lippo Village (SILO’s
flagship, established in 1996); Kebun Jeruk and Surabaya (acquired in 2002,
but first established in 1991 and 1977); and Lippo Cikarang (established in
2002). The balance of SILO’s hospitals are considered immature/developing,
although the majority were established or acquired in 2011–12 (with the
acquired hospitals first established in 2004–08), and are therefore mid- rather
than early-stage in their maturation. SILO’s Lippo Village facility achieved JCI
accreditation in 2007, but to date SILO’s other hospitals have not yet done so.
The company’s next largest competitors are Mitra Keluarga – owned by the
Kalbe Farma family (10 hospitals); Awal Bros (7 hospitals); and Sari Asih
Group (6 hospitals). Other notable competitors are Ramsay Sime Darby (3
hospitals), as well as regional hospitals in Singapore, Malaysia, and Thailand,
which are currently major beneficiaries of Indonesia-sourced medical tourism.
Source: FactSet, Macquarie Research, October 2014
Customer composition
Unlike in developed markets, where patients frequently visit their local (often
publicly funded) GP before seeking specialised care, in Indonesia, private
hospital customers typically proceed directly to hospitals to seek specialist
consultations. SILO’s business model is therefore actually a de facto hybrid
clinical and hospital model at present (although this is now slowly changing).
Approximately two-thirds of SILO’s patients are out-of-pocket patients, but
private insurance and government funded patients will likely grow in
significance over time, which will boost volumes but lower margins. About half
of SILO’s inpatient volumes are sourced from its outpatient department, and
the other half from its emergency department, which is a major focus for the
company (through the development of its private, nationwide 500-911
emergency number). Referral business remains negligibly small at present.
SILO’s current target market is primarily middle-upper income Indonesians, as
the high-end market typically travels abroad for medical care, while the lowerend market relies on public healthcare services (about 75% of Indonesians
are covered by government healthcare insurance, and this will be expanded
to 100% by 2019). In addition, SILO’s target market also includes high-income
Indonesians in need of emergency services. Longer term, SILO aspires to
service the full income range, however (as well as selective medical tourism).
Company history and background
SILO was established in 1996 as a JV between Gleneagles and a
predecessor entity to what later became LPKR. This JV established SILO’s
flagship Lippo Village facility. Following the onset of the Asian Financial Crisis,
the JV was dissolved. In 2002, Siloam acquired/established three additional
hospitals, and from 2011, commenced and aggressive expansion programme.
In mid 2013, LPKR spun-out SILO via IPO (priced at Rp9.0k), raising Rp1.4tr
in fresh capital, and diluting its stake to 86.5%. LPKR subsequently undertook
a placement of existing shares in early 2014, reducing its holding to 78.9%.
7 October 2014
2
Siloam Hospitals
Macquarie Research
Bridging the credibility gap: The bull case
Long term thematic supportive
On virtually any metric, Indonesia’s healthcare market appears considerably underserviced.
Healthcare spending is currently only about 3% of GDP, which is low not only by developed
world/OECD standards of c10% (the US should be excluded from analysis, as healthcare
spending is inflated by over-servicing due to litigation risk), but also relative to regional and
other lower-middle-income peers, which average closer to 4–5%. Furthermore, the number of
beds and doctors per capita is only circa 1/3rd and 1/10th, respectively, of DM averages, while
Indonesia’s life expectancy at birth – arguably the most all-encompassing measure of the
adequacy of domestic healthcare services, although rising, remains sub-optimal, at 71yrs.
Healthcare spending as a % of GDP
Fig 2
19.0%
20.0%
6.0
Doctors per 1,000ppl
Beds per 1,000ppl
4.9
5.0
16.0%
4.0
3.0
1.0
1.0
Source: WHO and IMF, Macquarie Research, October 2014
0.3
1.0
1.3
3.1
2.3
0.3
0.0
OECD av.
USA
DM average
UK
Malaysia
China
Singapore
India
Thailand
Indonesia
0.0%
0.7
2.8 2.8
1.8
Singapore
4.2%
1.5
China
4.0%
1.6
2.0
Malaysia
3.2%
2.2
2.0
5.7%
Thailand
3.0%
5.3%
India
8.0%
2.8
3.0
US
9.2%
UK
11.9%
12.0%
4.0%
Beds and doctors per 1,000 people
Indonesia
Fig 1
Source: Frost & Sullivan, Macquarie Research, October 2014
Internationally, growth in healthcare spending as a percentage of GDP has a well-established
relationship with growing levels of economic development (although demographics are also
vitally important). In addition, growth in Indonesian healthcare spending is likely to be given a
boost by the 2014–19 roll-out of universal public healthcare insurance (although 75% of the
population is already covered by various public healthcare schemes), as well Jokowi’s recent
election as Indonesia’s next president, given his stated intention to extend the public health
card policy he implemented as Jakarta governor to a nationwide policy.
In addition, while human capital constraints are a very real issue for the industry’s
development (see overleaf; we note that the under-penetration of physicians is much higher
than the number of hospital beds, indicating that this is the real market constraint), in the long
run (10–20 years), this is very likely a surmountable issue. It is difficult to find examples of
countries that have successfully developed and which have not, in the process, successfully
raised the level of domestic healthcare services, and Indonesia is unlikely to be an exception.
Siloam also has several important first-mover advantages
Moreover, SILO appears well placed to be at the forefront of the industry’s development. For
a start, the company is already the largest private hospital operator in Indonesia, and that
lead is likely to widen in coming years, given the company’s aggressive hospital roll-out
programme and its superior access to financing, due to its publicly-listed status and circa
US$1.5bn market cap. And investor demand for EM healthcare assets, coupled with a limited
range of domestic alternatives, and SILO’s existing highly-rated scrip, are likely to allow the
company to easily tap the equity market for additional financing as and when required.
In addition, we can identify multiple additional competitive/first-mover advantages:
Employer of choice: SILO’s state-of-the-art equipment, brand prominence, and scale, will
likely make it easier than average for SILO to attract the best domestic doctors. And being
an employer of choice could quickly become a major self-perpetuating advantage if it
enabled SILO to attract industry-leading medical specialist by offering them the opportunity
to work with other industry-leading people. SILO also has a partnership scheme in place
with UPH (Lippo’s education operations) to develop a pipeline of new doctors.
7 October 2014
3
Siloam Hospitals
Macquarie Research
License procurement: It requires 36 separate licenses in Indonesia to open a hospital – a
bureaucratic barrier to entry that is likely to advantage well-connected domestic business
groups (such as Lippo). In addition, there are some regulatory restrictions on foreign
participation (such as a 67% foreign ownership cap). This is likely to make it easier for
SILO to expand its hospital network in Indonesia than regional/international competitors.
Partnership with LPKR: SILO’s affiliation with the Lippo Group also confers on it further
advantages in the form of access to new sites; an ability to operate an “asset light” strategy
(with land and building development costs borne by LPKR); and LPKR’s willingness to
provide SILO’s upstart hospitals with rental subsidies for the first 3–4 years (as well as
bear some of the risk of low occupancy rates through variable rental arrangements).
An established brand: Unlike in more developed healthcare markets, it remains standard
practice in Indonesia for people seeking healthcare services to bypass a clinical GP
consultation and proceed directly to a specialist located at a hospital (which is generally
thought to be due to the low level of faith placed in the quality of GP advice).
Consequently, SILO’s referral business remains minimal, and SILO relies heavily on “walkin” traffic. This renders brand prominence of much greater importance than in many
developed hospital markets. While this operating model persists (and it is already slowly
changing), having an established brand is likely to be significant asset in attracting
increased patient volume.
Nationwide emergency number: Indonesia currently has no nationwide public “911”
emergency number. Consequently, SILO is promoting its private 500-911 number, and is
the only healthcare provider to be rolling this out such a number on a national scale
(although several competing operators have regional numbers). If consumer mindshare of
this number is achieved, this could become an important asset over time – particularly
given that c50% of SILO’s inpatient volumes driven are by its emergency department.
Fig 3
Trend in Indonesian hospital numbers
2,000
Public
Private
Fig 4
Player
599 for profit;
724 not-for-profit
1,725
1,750
1,608
1,500
1,250
1,000
1,202
1,295
1,372
815
535
591
915
634
750
500
250
667
704
738
793
810
2009
2010
2011
2012
2013
0
Source: MoH, Macquarie Research, October 2014,
List of major private hospital operators (est.)
Hospitals
Siloam
Mitra Keluarga
Aw al Bros
Ramsay Sime Darby
Omni Hospital
Mayapada
KPJ Healthcare
Ciputra Hospitals
Pakuw on Jati & Elang Mahkota
Other for-profit private hospitals
Total for-profit hospitals
% of total
17
10
8
3
2
2
2
1
1
553
599
2.8%
1.7%
1.3%
0.5%
0.3%
0.3%
0.3%
0.2%
0.2%
92.3%
100.0%
Source: Various sources, Macquarie Research, October 2014
Acquisitions/industry consolidation a major opportunity
In addition, Indonesia’s private hospital industry remains highly fragmented. Consequently,
there are likely to be significant acquisition opportunities for the larger players over time –
particularly those with superior access to capital and an ability to leverage “network”
advantages, such as including acquired hospitals within the company’s brand network, and
leveraging superior bargaining power with equipment and pharmaceutical suppliers.
Amongst SILO’s existing hospitals, 7 were acquired by acquisition, and only 10 established
organically, and 2 of these 7 acquisitions also occurred as recently as December 2013 (two
BIMC branded Bali-based hospitals) – albeit that the size was small (a combined 50 beds,
acquired for US$26m). Opportunistic bolt-on acquisitions could complement SILO’s rapid
organic expansion programme, and will be aided meaningfully by its ability to fund
acquisitions through its highly-rated scrip (which likely offers the company the lowest cost of
equity in the industry), and (for the moment) debt-free balance sheet post the company’s IPO.
7 October 2014
4
Siloam Hospitals
Macquarie Research
Private hospital assets are highly rated – especially market leaders,
and especially in emerging/ASEAN markets
Market-leading private hospital operators generally have robust businesses characterised by
(1) defensive cash flows; (2) high levels of free cash flow generation; (3) GDP+ growth
profiles, aided by aging populations in many markets, and above-average growth in careintensive non-communicable diseases; and (4) the ability to expand margins over time
through improving occupancy; brownfield expansions; and pricing (particularly in emerging
markets where out-of-pocket patients are a larger share of a hospital’s payer mix).
In addition, incremental greenfield and acquisitive-based expansion typically augments
overall growth rates, resulting solid, consistent growth, coupled with high returns on capital.
Consequently, well-run private hospital assets are generally highly rated, and in the
developed world generally trade at above-market multiples of 20–25x earnings.
Furthermore, in EMs (and especially emerging Asia at present), multiples are higher still –
generally 30–50x. This latter multiple premium reflects not only the superior growth prospects
these markets are seen to offer, but also the fact that margins are generally higher, owing to
more limited competition, and a greater percentage of customers being out-of-pocket payers
with limited bargaining power (as compared to private insurance or government patients).
In addition, we cannot help but notice that the long term share price charts for regional private
hospital operators – almost without exception – seem to go from the bottom left to the top
right (Fig 5), albeit aided by multiple expansion in recent years. Prima facie, shorting a stock
like SILO therefore appears to be a risky proposition.
Share price performance of regional hospitals
Rebased
60.0x
Bangkok Dusit
40.7x
Raffles
40.0x
Ramsay
800
52.3x
50.0x
Bumrungrad
1,000
Current PER multiples – regional comps (T+1)
38.9x
36.6x
35.5x
32.8x
31.2x
Raffles Medical
1,200
Fig 6
KPJ
Fig 5
30.0x
600
20.0x
400
10.0x
200
Bumrungrad
Bangkok Chain
Bangkok Dusit
Apollo
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Source: Bloomberg, Macquarie Research, October 2014
IHH
0.0x
0
Source: Bloomberg (6 Oct 2014), Macquarie Research, October 2014
Exceptions exist, however. Margins and returns on capital for hospital operators in developed
markets who rely heavily on government-funded patients – particularly in markets where the
relevant government’s finances are under pressure and reimbursement rates to healthcare
providers are being cut (such as in some European economies at present) – are much lower
(and are falling). In addition, economic returns earned by sub-scale operators, as opposed to
the best-in-class operators which are typically listed, are also frequently substandard.
However, Indonesia’s healthcare market is unlikely to demonstrate these characteristics for a
long time, and SILO is likely to be amongst the market leaders rather than a sub-scale player.
7 October 2014
5
Siloam Hospitals
Macquarie Research
Significant upside if its expansion plans can be delivered: A
plausible valuation case still exists for SILO at current levels
Lastly, despite SILO’s very high multiples of current earnings, a plausible valuation-driven bull
case still exists. The immediate “elephant in the room” to address is SILO’s extremely high
PER of current earnings. It is important to emphasise that the nature of hospital assets is that
newly-established hospitals typically have long gestation periods and book losses in early
years, but if successfully run, generally become highly profitable and cash generative in later
years. A PER-based approach will therefore tend to undervalue hospital operators with a
significant number of immature hospitals, and SILO is just such an operator at present.
At present, only 4 of SILO’s 17 hospitals are categorized as “mature” by the company, and
Fig 7 highlights that the combined revenues of these facilities was running at an annualised
rate of about Rp1.6tr in 1H14A (US$133m), or an average of about US$33.2m per hospital
(although only US$24.2m excluding the large revenues booked by SILO’s flagship Lippo
Village facility). Meanwhile, operating margins averaged 13.4% in 1H14A (EBITDA margins
16.6%). Valued at a 30x unlevered PER (SILO has no net debt at present), these facilities
alone would be worth US$400m, or slightly more than Rp4,000 per share (we discuss the
appropriateness of a 30x multiple in our valuation section).
Meanwhile, the company’s 13 immature/developing hospitals are generating combined
revenues of only about the same amount (and only about US$9.9m per hospital, or about
70% less than SILO’s mature hospitals on average), and delivering negative operating
margins of –4.1% (although positive 9.1% margin at the EBITDA level). Depreciation is much
higher for these facilities relative to sales (13.2%) due to their relatively low revenue bases
(absolute depreciation is US$1.3m per facility vs. US$1.1m for mature facilities – higher due
to the more recent acquisition of equipment at less favourable exchange rates).
Fig 7
Summary of SILO’s mature vs. immature hospital portfolio
Rp bn
Mature
Immature/devel.
Combined
No. of hospitals
No. of beds (capacity)
Average hospital size (beds)
Annualised revenues (1H14A)
EBITDA margins (1H14A)
EBITDA
Depreciation to sales (1H14A)
Operating margins (1H14A)
Operating profit (1H14A annualised)
NOPAT (25% pro forma)
4
867
217
1,594
16.6%
265
3.2%
13.4%
213
160
13
3,100
238
1,541
9.1%
141
13.2%
-4.1%
-63
-47
17
3,967
233
3,136
12.9%
406
8.2%
4.8%
150
113
Average revenue per hospital (US$m)
Average revenue per bed (US$ '000)
Average depreciation per facility (US$m)
$33.2
$153.2
$1.1
$9.9
$41.4
$1.3
$15.4
$65.9
$1.3
Assumed mature state for immature
Revenue per hospital
EBITDA margins
Depreciation to sales ($1.3m/$24.2m)
Operating margins
NOPAT (Rp bn)
$24.2
16.6%
5.4%
11.2%
317
Mature earnings (Rp bn)
EPS (Rp)
PER multiple
Valuation (Rp bn)
Valuation (US$m)
Value per share (Rp)
160
138
30.0x
4,800
$400.0
4,152
317
274
30.0x
9,508
$792.3
8,224
477
413
30.0x
14,308
$1,192.3
12,376
PER at current price
109.8x
55.4x
36.8x
Source: Macquarie Research, October 2014, *US$24.2m excluding SILO’s Lippo Village flagship.
7 October 2014
6
Siloam Hospitals
Macquarie Research
If these facilities were to eventually achieve US$24.2m in revenues per facility (the same as
the amount being booked by SILO’s mature hospitals excluding Lippo Village); enjoy 16.6%
EBITDA margins (on par with SILO’s current mature hospitals); and operating margins of
11.2% (based on US$1.3m pa in depreciation per facility), valued at 30x, they would add an
additional Rp8,200 to SILO’s valuation, and lower SILO’s combined PER at Rp15,200 to only
36.8x – a level that is more broadly on par with regional comps at present.
This also excludes the upside from new hospitals
In addition to the above, SILO has 23–29 new organic hospital in the pipeline, 23 of which are
targeted for opening by FY17E (although delays are quite possible). As discussed in our
valuation section, a swift profitability ramp up in these facilities could add as much as
US$35m in NPV per new hospital, suggesting scope for the addition value accretion of
US$700–800m from this hospital pipeline. This would bring SILO’s combined value to closer
to Rp20k per share. In addition, further hospital openings post FY17–20E are likely.
However, this new-hospital-NPV is highly sensitive to the pace of occupancy ramp-up, and as
we discuss in the following section, we believe the ramp-up will be slower than targeted. In
addition, it is important to emphasise that in the case of SILO’s new hospitals, it has not yet
incurred the necessarily establishment capex (which is expected to average about US$15m
per facility). This capex, which in the aggregate will likely exceed US$300m, will also be 20–
30% higher in rupiah terms vs. the time of SILO’s IPO due the intervening depreciation of the
rupiah (something the market appears to have overlooked). The value accretion of these
hospitals will therefore be significantly less the current value of SILO’s existing hospitals.
Nevertheless, SILO’s hospital roll-out pipeline also offers additional blue sky and potentially
very attractive long term growth options, if attractive ROICs can be achieved. Our base case
SOTH (“sum of the hospitals”) valuation, which we discuss later in the report, includes an
average NPV accretion of US$20m per hospital across SILO’s 23-hospital pipeline (Fig 8).
Fig 8
Our SOTH (“sum of the hospitals”) valuation*
Hospital category
Method
US$m
Rp bn
Per share (Rp)
Mature hospitals
Immature hospitals
Future hospitals
Net cash/(debt)
Total
30x PER FY14E earnings
30x FY20E discounted to PV @ 10%
US$20m per hospital x 23; PVed at 10%
2Q14A BV
$430
$593
$388
$1
$1,412
5,163
7,111
4,656
13
16,943
4,466
6,151
4,027
11
14,656
Source: Macquarie Research, October 2014, *Please refer to our valuation section for a more detailed discussion.
7 October 2014
7
Siloam Hospitals
Macquarie Research
SILO’s market cap is small relative to its regional peers
Further supporting the valuation case for SILO is the fact that – despite the company’s
elevated multiples at present – the company’s market capitalisation of cUS$1.5bn remains
significantly below several regional peers – notably its Thai peers. This would seem to imply
the capacity for significant further long term upside. In addition, the company’s multiples on
an EV/bed or EV/hospital basis also comparatively low (at least in relative terms; it is possible
that hospital assets in the aggregate are overvalued in Asia at the moment).
We note, however, that (1) SILO’s average bed utilisation is much lower than its peers; (2)
that SILO has a significantly less-developed business, with service standards well below its
peer group; and (3) that these comps have a significantly higher quantity of capital deployed
(which often took decades to accumulate), and in many cases own rather than lease the
relevant hospital premises (which should support a significantly higher EV/bed valuation
multiple vs. leased facilities). These comparative metrics may therefore overstate the upside.
Nevertheless, they do point to the existence of significant room for future value creation.
Fig 9
Market capitalisations of regional peers
Fig 10
Comparative EVs per hospital bed
US$'000
$7,000
$12,393
$6,000
$12,000
$5,000
$3,000
$4,000
$2,859
$2,000
$2,511
$1,744
$2,000
$2,839
$1,440
$1,217
$883
$753
$1,518
$1,000
$594
$453
$428
$398
$363
Siloam
$6,000
Apollo
$4,000
Bangkok Chain
$8,000
KPJ
$8,689
Fortis
$10,000
$5,825
7 October 2014
Bangkok Dusit
Bangkok Chain
Fortis
KPJ
Siloam
Raffles Medical
Apollo
Bumrungrad
Bangkok Dusit
IHH
Source: Bloomberg, Macquarie Research, October 2014
Bumrungrad
$0
$0
IHH
$14,000
Source: Company data, Bloomberg, Macquarie Research, October 2014
8
Siloam Hospitals
Macquarie Research
The bear case: So why the Neutral?
So given the foregoing, why only the Neutral recommendation? The short answer is that we
believe it is likely that SILO’s new hospital profitability ramp-up will be much slower than
targeted (SILO is targeting US$25m in revenue, and 18–20% EBITDA margins, within four
years – see our appendix), and that investors are also likely underestimating the medium
term execution and earnings risks associated with SILO’s aggressive hospital roll-out.
The various risks we discuss in more detail below, which we believe the market may be
insufficiently acquainted with, include the following:
Overexpansion risk: New hospitals have long gestations periods, and investing in
expensive and rapidly-depreciating medical equipment too far ahead of future demand can
result in poor return on capital outcomes, even if occupancy does eventually rise. We
discuss also how SILO’s occupancy rate is already low and declining, and so the
company’s aggressive expansion plans depend on healthcare spending inflecting upwards.
Healthcare spending rising more slowly than expected: We believe this risk is real,
due to demographic; affordability; and quality constraints, and note that most of the
inflection in healthcare spending as a percentage of GDP appears to occur at high levels of
income that are far above Indonesia’s present level of GDP per capita. Competition from
regional medical tourism hubs is also likely continue to pressure the domestic healthcare
industry, while Indonesia’s economy slowing economy also poses additional challenges.
Finally, the accretion to market demand from Indonesia’s roll-out of universal healthcare
could be less than expected, due to c75% of the population already being covered.
Doctors the key bottleneck; not facilities: The primary constraint on the upgrading of
domestic healthcare services is not the availability of hospital facilities, but the availability
of skilled personnel – a bottleneck that could require decades to redress – and the
associated risk that that Indonesia’s pace of hospital build outpaces human capital
upgrading, driving inflation in doctor compensation and pressuring hospital margins.
Inappropriate use of comps: Finally, we believe SILO’s business model and margin
prospects are not comparable to the elite group of listed regional hospital companies SILO
is frequently compared with, who offer genuinely world class services; service the high-end
market; and who benefit from significant inflows of medical tourism. In addition, we
highlight how SILO’s EBITDA margins are also not directly comparable to regional peers,
due to its capital light rental model, and inclusion of doctor service fees in its top line.
In the very long term, we are bullish on SILO’s prospects, and believe these challenges can
be overcome. However, the issue with long-term thematic stories is often not the long run but
rather the short run – particularly when starting valuations are high. Indeed, we find it
something of a delicious irony that bull cases for the stock are premised on 20-yr supportive
thematics when the holding periods of most investors continues to shorten and is generally
less than 24–36mths. We believe a better entry point is likely to present itself along the way.
New hospitals have long gestation, introducing overexpansion risks
In contrast to the typical incremental, measured approach to expansion adopted by hospital
operators, SILO is adopting a “foot to the floor” approach, and aiming to essentially triple its
hospital network in five years, from 13 hospitals in April 2013 to 40 by FY17E. This is one of
the most aggressive hospital roll-out stories we can identify globally.
This strategy is not without risk. One of the reasons hospital operators typically adopt a
measured, incrementalist approach to growth is that new hospitals are (1) highly capital
intensive to establish; and (2) typically have long gestation periods of five years or more,
before profitability reaches acceptable levels. These long gestation periods reflect the fact
that healthcare services are a highly relationship-driven business, and that it therefore takes a
long time for relationships with patients and GP referral networks to develop, and for new
hospitals to become integrated into a given community. Consequently, aggressive expansion
carries the risk of mushrooming operating losses (and capital demands).
7 October 2014
9
Siloam Hospitals
Macquarie Research
Mayapada’s experience highlights the risk of overinvestment
One of the clearest examples of the impact of over-expansion is SILO’s IDX-listed hospital
peer SRAJ (Not Rated), which operates two Mayapada-branded hospitals. Mayapada
acquired its first hospital in 2008 (which was originally opened in 1995, and therefore already
mature and well established), and until late 2013, the company was quite profitable. However,
in late 2013, the company opened a new upscale facility in South Jakarta, and since that
time, the company has suffered huge losses, as rates of utilisation have disappointed.
Fig 11
Trend in Mayapada margins
Fig 12
Trend in Mayapada revenues
Rp bn
30.0%
20.0%
26.5%
23.4%
14.8%
23.7%
14.4%
12.2%
14.4%
221
16.3%
195
200
9.3%
8.6%
10.0%
22.3%
250
176
167
5.1%
149
150
0.0%
106
-3.3%
EBITDA margins
-10.0%
116
100
Depreciation to sales
-20.0%
Operating margins
-17.1%
-19.5%
-30.0%
FY10a
FY11a
FY12a
FY13a
1H14a
Source: SRAJ Company data, Macquarie Research, October 2014
50
0
FY10a
FY11a
FY12a
FY13a
1H13a
2H13a
1H14a
Source: SRAJ Company data, Macquarie Research, October 2014
We have visited the facility, and to the naked eye, it seems very impressive, and sports all the
latest state-of-the-art equipment. However, looks can be deceptive, and Mayapada’s P&L
highlights that the “build it and they will come” approach to expansion will not necessarily
work, despite the apparent vast under-servicing of the domestic market.
Mayapada’s experience appears to partly reflect company-specific execution issues, and the
company having made the mistake of targeting its hospitals too much to the high end (as this
market travels overseas), and its losses are far above those typically being booked by SILO
on its upstart hospitals. Nevertheless, Mayapada’s experience does serve to highlight (1) the
risks/costs of investing too far ahead of future demand; and (2) that the major constraint on
the development of world class healthcare services in Indonesia is not a scarcity of facilities
or equipment, but rather the inability to staff them with sufficiently well-trained doctors.
Furthermore, because the bulk of upfront capex is committed to the acquisition of advanced
medical equipment, which owing to the rapid pace of innovation in medical device technology
tends to age/depreciate rapidly, the economic cost of overexpansion can be high, and result
in extended periods of losses/poor returns on capital. As we discuss in our valuation section,
the sensitivity of the NPV of new hospital openings to the pace of ramp-up is significant, and
extended lead-times on the ramp-up of new facilities can quickly reduce their NPV to zero.
SILO’s occupancy rates are already low and falling
Notable is that since the commencement of SILO’s rapid hospital roll-out programme in 2011,
SILO’s occupancy rates (and hence profitability) has been falling, from 44.8% in FY11A, to an
estimated 28.8% in FY13A. This improved slightly to an estimated 32.9% in 1H14A, due to
the delayed opening of new hospitals, and the contribution from SILO’s two BIMC Bali
hospital acquisitions in late 2013, but we expect occupancy rates to come under renewed
pressure as new hospital additions ramp up from late 2014. SILO’s aggressive hospital rollout plan is therefore coming at a time when occupancy rates are already low and falling.
We note that SILO calculated its occupancy rates in its IPO prospectus on the basis of
operational beds, whereas we are using total hospital bed capacity (i.e. the number of beds
SILO’s hospital are designed to accommodate). At the time of SILO’s IPO, its operational
beds were only 49.6% of capacity. However, we believe SILO’s approach acts to significantly
overstate capacity utilisation, as the incremental capex and addition to overall hospital fixed
costs of bringing new beds into capacity is relatively minimal.
7 October 2014
10
Siloam Hospitals
Macquarie Research
Furthermore, while the company’s EBITDA margins have remained relatively stable in recent
years at about 11% (although they increased to 14.7% in 1Q14A, before declining to 12.0% in
2Q14A),1 its operating (i.e. EBIT) margins have been falling, due to escalating depreciation
charges alongside the rapid capacity additions SILO has instituted. And it is in this line item
that the cost of SILO’s declining occupancy levels can be clearly observed.
Fig 13
Trend in occupancy rate (vs. bed capacity)
Fig 14
Trend in SILO’s EBITDA/operating margins
EBITDA margins
50.0%
14.0%
44.8%
45.0%
35.0%
32.9%
31.6%
13.3%
11.2%
11.1%
11.0%
9.8%
10.0%
28.8%
30.0%
EBIT margins
12.9%
12.0%
40.0%
Depreciation-to-sales
8.2%
8.1%
8.0%
7.0%
6.7%
25.0%
20.0%
6.0%
15.0%
4.0%
5.1%
4.3%
4.1%
3.1%
3.0%
10.0%
2.0%
5.0%
0.0%
0.0%
FY11a
FY12a
FY13a
1H14a
Source: Company data, Macquarie Research, October 2014
FY10a
FY11a
FY12a
FY13a
1H14a
Source: Company data, Macquarie Research, October 2014
The company encourages the market to focus on EBITDA, where SILO’s margin and
earnings trend appears more encouraging. However, in SILO’s case, we believe depreciation
is a fundamentally important and very real expense category, as maintaining state-of-the-art
equipment is core to SILO’s operating model, and such equipment needs to be upgraded
from time-to-time to stay abreast of the latest technological trends. Poor utilisation rates
during equipment lifecycles therefore represent a real loss to SILO.
SILO also downplays the extent of ongoing maintenance capex demands, but it is notable
that SILO’s mature hospitals have seen maintenance capex routinely exceed depreciation
costs in recent years (Fig 15) – something that will likely continue to be the case over time
due to Indonesia’s high inflation rate.2 Consequently, not only is depreciation a real expense,
but it actually understates ongoing cash demands (on a long term basis).
Fig 15
Capex vs. depreciation on mature facilities
Fig 16
Rp bn
Rp bn
90
300
82.9
Capex
80
62.8
278
EBITDA (numbers on top)
208
197
60
200
50.9
202
45.4
50
40
Operating profits
Depreciation
Depreciation
250
70
SILO EBIT, depreciation, and EBITDA trend
150
38.2
32.0
30
27.9
29.7
29.2
25.9
133
141
133
120
32
100
128
52
90
20
50
101
10
89
77
80
76
43
0
0
FY10a
FY11a
FY12a
FY13a
Source: Company data, Macquarie Research, October 2014
1H14a
FY10a
FY11a
FY12a
FY13a
1H13a
1H14a
Source: Company data, Macquarie Research, October 2014
1
We note that SILO’s FY10–13A EBITDA margins shown in Fig 13 is below what was outlined in SILO’s
prospectus and its presentation materials. This is because SILO’s definition of EBITDA previously excluded
several cost items, such as provisions for post-employment employee entitlements, which we consider to be a
genuine expense categories which have no justification for being excluded from EBITDA. However, we note
that SILO’s treatment in 1H14A has since normalised to reflect the methodology we are using.
2
7 October 2014
Excludes Lippo Cikarang in FY11A and FY12A due to a lack of disclosure by SILO.
11
Siloam Hospitals
Macquarie Research
Also notable is the fact that in the pre-IPO period, SILO’s funding costs were being carried by
LPKR via the provision of interest-free inter-company loans. No such luxury will be available
with respect to future capex, which is likely to exceed US$300m over the next 3–4yrs
(although this may be partly equity funded). Funding costs in Indonesia are high at the
moment (typically double-digit), and SILO’s ROE is already only c5%. Rapidly rising
depreciation and funding costs, coupled with at best break even EBITDA outcomes on new
hospital openings, could quickly push SILO into loss-making territory.
Cannibalisation risk exists
In addition, it is noteworthy that SILO’s mature hospitals experienced a sharp slowdown in
revenue growth during 1H14A, to 5.6% YoY in 1Q14A, and to 7.4% YoY in 2Q14A – rates of
growth that are only, at best, marginally above Indonesia’s CPI. The aggregate number of
OPD and IPD visits to SILO’s mature hospitals was also roughly flat YoY in 1H14A. This likely
contributed to the decline in mature hospital EBITDA margins to 16.6% in 1H14A, from 19.0%
in the pcp, as hospital level cost inflation is likely running above the pace of CPI.3
While a slowing economy has likely contributed, it is also possible that this slowdown partly
reflects growing cannibalisation from SILO’s newer hospitals, and this cannibalisation impact
might increase in coming years. Notable is that SILO expects to add an additional 23
hospitals between now and FY17E, but only intends to increase the number of cities in which
it is present from 13 to 25. By implication, that means that approximately half of these new
openings will be in cities that already have a SILO hospital facility (see Fig 17).
Fig 17
SILO’s hospital footprint and expansion plans by geography
Source: SILO 2Q14A investor presentation, Macquarie Research, October 2014
Healthcare spending may ramp up more slowly than expected
SILO’s rapid capacity addition plan, despite its existing low and declining occupancy rates,
appears to represent an implicit bet that Indonesian private healthcare demand is set for a
very sharp upward inflection in coming years. And given the under-serviced nature of
Indonesia’s healthcare industry, many might quite reasonably argue that the risk of
overexpansion is limited. And the bulls might well be proven right. Nevertheless, we believe
the risk needs to be explored, because SILO’s share price appears to be pricing in the said
inflection, and we believe the risks are higher than the market (and SILO) believes.
3
SILO attributed the decline in mature hospital profitability to the expiry of rental free terms granted by LPKR
to SILO in the pre-IPO period (up to May 2013). However, it is notable that SILO’s mature hospital profitability
also fell sharply HoH in 1H14A and QoQ in 2Q14A as well.
7 October 2014
12
Siloam Hospitals
Macquarie Research
While analysts frequently highlight the fact that healthcare spending in Indonesia remains low
by international standards, the reasons why this is the case are seldom explored, and we
believe the market is actually underserviced for good reason:
Demographics: Healthcare spending is highly correlated with the size of the elderly
population – a fact that is demonstrated amply by Fig 19 – and Indonesia’s population is
young, with a median age of just 29yrs. Furthermore, in general, high income countries
have much older average populations (Fig 18). The difference in spending as a percentage
of GDP may therefore have as much to do with demographics as income levels.
Fig 18
Demographic profile
Fig 19
25%
45
22%
% of population >60yo
35
30
15%
$25,961
$25,000
$20,000
$16,389
25
12%
10%
$30,000
40
Median age (RHS)
20%
US annual hospital spend per capita (2004)
8%
8%
20
15
6%
$15,000
$10,778
$10,000
$7,787
10
5%
5
0%
$5,210
$5,000
$3,370
$2,650
0
Lower
income
Lower-middle Upper-middle High income
income
income
Indonesia
$0
0-18
Source: WHO Health Statistics, Macquarie Research, October 2014
19-44
45-54
55-64
65-74
75-84
85+
Source: US hospital industry report, Macquarie Research, October 2014
Affordability: The vast bulk of the Indonesian population cannot afford the type of private
hospital services SILO provides, and are forced to rely on public healthcare services, and
while public spending has been rising, it has remained constrained by Indonesia’s low
GDP per capita; low tax-to-GDP ratio; and wasteful use of fiscal resources. Economic
growth will drive rising affordability over time, but the process is inherently slow, and for the
time being, the outlook for Indonesia’s economic growth is rapidly deteriorating.
Quality deficiencies, driven by the low quality of domestic doctors: This constraint
has the effect of limiting the perceived “value for money” of expensive domestic private
healthcare services (vs. public services), and driving large and growing outflows of medical
tourists to competing regional markets such as Singapore, Malaysia, and Thailand.
None of these factors – perhaps barring the outlook for government spending on healthcare
(see below) – looks set to change rapidly. Furthermore, also seldom pointed out is the fact
that Indonesia’s healthcare spending as a percentage of GDP has actually been flat for
almost a decade (Fig 20), in spite of a booming economy and the putative vast level of market
under-servicing (which is to some extent inconsistent with SILO’s low occupancy rates).
Fig 20
Indonesian healthcare spending to GDP
Trending relatively flat
4.0%
Public
2000
2.8%
2.5%
2.8%
2.8%
1.7%
1.7%
9.8%
10.0%
2.9%
2.4%
8.0%
1.9%
1.5%
1.4%
1.9%
1.9%
1.8%
1.8%
1.8%
5.4%
5.2%
6.0%
4.0%
1.4%
5.8%
4.1% 4.4%
4.0%
1.0%
0.5%
11.9%
3.0%
2.9%
2.2%
2.0%
1.5%
2.9%
2011
12.0%
3.1%
3.0%
Change in spending by group: 2000–11
14.0%
Private
3.5%
2.5%
Fig 21
2.0%
0.8%
1.0%
1.0%
0.9%
1.0%
1.2%
1.1%
1.1%
1.1%
0.9%
1.2%
0.0%
Low income
0.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: WHO, Macquarie Research, October 2014
7 October 2014
Lower-middle
income
Upper-middle
income
High income
Source: WHO Health Statistics, Macquarie Research, October 2014
13
Siloam Hospitals
Macquarie Research
Indonesia’s experience does not seem unique in this regard, as according to the WHO lowermiddle and upper-middle income countries in the aggregate only experienced a 30–40bp
increase healthcare spending as a percentage of GDP in the 11 years to FY11A (which was a
decade that was an economic boon for emerging countries). Furthermore, the gap in
healthcare spending between lower-middle and upper-middle income countries (Indonesia is
part of the “lower-middle income” group in WHO’s statistics) is not particularly large (Fig 21).
Furthermore, life expectancies – arguably the most all-encompassing measure of the
adequacy of healthcare services – have been rising rapidly in most markets, with the average
life expectancy in low, lower-middle, and upper-middle income countries increased from 53 to
62yrs; 59 to 66yrs; and 68 to 74yrs, respectively, during 2000-11 – a trend which is
inconsistent with the putative vast level of market under-servicing in these regions.
Furthermore, in Indonesia, it rose from 62yrs to 71yrs – outperforming its peer group.
In addition, Fig 21 highlights that where the most rapid increases in healthcare spending
occur is in the high echelons of incomes, and it is notable that the vast majority of the OECD
countries that comprise this group have (1) very different demographic profiles to Indonesia
(i.e. rapidly aging populations); and (2) extremely well-developed and funded public
healthcare systems, reflecting the wealthy status of these nations.
Lastly, Indonesia’s economy is in the midst of a rapid economic slowdown at present, as it
comes out of a commodity- and liquidity-fuelled economic boom, the supporting conditions of
which are now rapidly receding. Slowing economic growth is also likely to significantly
dampen the pace of increased demand for private hospital services.
Boost to demand from UHC may be less than expected
We believe it is likely that the roll-out of universal healthcare (UHC) will accelerate healthcare
spending growth in Indonesia, and will likely benefit private hospital operators via the
“crowding out” effect of overburdening public healthcare resources, thereby driving a forced
upgrading to private services (which appears to have occurred in Thailand post the 2002
implementation of UHC). In addition, an increase in government-funded referral business is
likely. However, the demand accretion may be less than is presently expected, as:
As at 2011–12, an estimated 151.5m Indonesians were already covered by some form of
health insurance (Fig 22), representing approximately 60–65% of Indonesian’s population,
and MoH data indicates that this coverage had increased further to 181.3m people as of
2013, or 76.2% of the population (based on the 238m population base used by the MoH,
which is likely slightly understated). This rate of penetration has likely increased further
during 2014, and the full roll-out to 100% is expected to occur only gradually, by 2019. The
boost to demand will therefore be incremental in nature, rather than a step change.
Owing to very low quality standards in existing public healthcare services, those that can
afford private healthcare have likely already upgraded where possible.
The roll-out in universal healthcare is expected to be accompanied by a significant l