IHH Healthcare Berhad (IHH) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Second Quarter and First Half 2021 Financial Results of IHH Healthcare Berhad analyst briefing conference call. [Operator Instructions] I must advise you that this conference is being recorded today, 27th of August 2021. I would now like to hand the call over to your first speaker today, Ms. Penelope Koh from Investor Relations at IHH. Please go ahead, Ms. Koh.

Thank you. Good morning, and welcome to IHH Healthcare Second Quarter and First Half 2021 Earnings Call for the period ended 30th June 2021. Thank you for joining us today. I'm Penelope Koh from Investor Relations. With me on the call today are Dr. Kelvin Loh, Managing Director and CEO; Joerg Ayrle, our Group CFO. We also have our colleague, Evren, who is the Head of Strategic Planning and Investments from Acibadem. So for those of you on the web, you'll be able to view and download our presentation slides as well as the press release. The materials are also available for download on the IHH website. As for the sequence of event, Dr. Loh will share with us the key highlights for the second quarter and an update on the COVID-19 contribution for the group. Thereafter, Joerg will provide the financial and operational performance before Dr. Loh wraps up by discussing the sustainability journey and the outlook for the group. We'll have a Q&A session after the presentation. So with that, I'll turn over the call to Dr. Loh. Dr. Loh, please.

Thanks, Penny. So before we start with the results, I would like to take the opportunity to say a big thank you to our frontline health workers for staying resilient managing the COVID-19 situation, taking best care of our patients. The good news is that the COVID-19 restrictions have recently been more relaxed in some of the countries we operate in, especially for fully vaccinated people. And social restrictions are lesser now. Daily reported cases and deaths are going down in many places that we operate. But of course, no room for complacency. The Delta variant has -- still rise and making things complicated. And so the pandemic war is far from over. India and Malaysia and Turkey still has 5-digit cases daily, and our colleagues continue to battle this every day and cope with the situation. I understand how stressed they can be from this prolonged crisis. And so we are doing all we can to look after them. We are conducting vaccination camps. We're helping out with mental health and wellness, taking care of their loved ones as best as we can as well during this time. These are challenging times, and there's no doubt about that. But we will get through this, and we'll get through this by working together. We continue to ramp up our COVID-19 support efforts, and there is no better time than now to demonstrate our commitment as a health care provider and deepen our trust with patients, government and our community. In Malaysia, for example, we continue to conduct COVID-19 lab testing and treat non-COVID patients decanted from government hospitals so that we can help them manage the flow. In fact, more than 600 COVID patients have been treated in Q2 in Malaysia. On vaccination front, we are running 19 vaccination centers through our various -- through our vaccination service. In Singapore, we continue, of course, to do lots of COVID prevention services, including border screening, on-arrival testing, and lots of COVID lab test as well. In Turkey and in India, similarly continuing with lab testing and treating COVID even inpatient and, of course, helping the vaccination drives, too. So going on to Slide 4. I'd like to give you a sense clinically on our operations. In Malaysia, PCMC conducted its 101st kidney transplant and also marked its 12th year in clinical excellence since opening. Pantai Hospital Penang became the first hospital in the northern region of Malaysia to conduct a drive-through vaccination service. I'm also very proud of our 5 nurses who received the Nurses' Day Merit Award awarded by Singapore's Ministry of Health for outstanding performance. In Turkey, Acibadem was rewarded with the Golden Award for Health Institutions at the Social Media Awards Turkey. In Europe, our Tokuda Hospital passed with honors in an international quality assessment for COVID-19 diagnostics, and Acibadem Sistina opened up a premium physical therapy and sports center. So turning on to Page 6 on revenue. Revenue grew 66% albeit from a lower base in Q2 2020 when the lockdowns of COVID-19 started. This was further boosted by COVID-19 services that we have been rendering, such as testing, screening and vaccination services. There was also a small contribution from the consolidation of DDRC SRL since April 21 and also our acquisition of PCMC in September '20. Correspondingly, EBITDA has increased to MYR 1.1 billion. Net operating income increased to MYR 463.6 million. Net income itself grew to MYR 483 million on the back of stronger EBITDA as more patients returned to our hospitals and from COVID-19 support services providers. Importantly, cost savings has contributed to this in India and in Gleneagles Hong Kong. Gleneagles Hong Kong, in fact, achieved EBITDA breakeven in May 2021 and has been on a positive trajectory since. This net income also includes the remeasurement of fair value of our interest in DDRC SRL; disposal gains from Apollo Gleneagles Hospital, which were, of course, then offset by a substantive write-down of our Parkway Yangon Hospital and Gleneagles Chengdu Hospital. If you turn with me to Slide 7. We have put together this new slide to show you our performance in the last 8 quarters so you can see the trend. You'll see in Q4 '19 and Q1 '20 an overall dip, which was due to COVID-19. But we have seen that progressive, sustained recovery as we move towards the right-hand of the chart, which is where we are today. In fact, in Q2 '21, we recorded our highest EBITDA and net income over the past 8 quarters and even above pre-COVID levels, which is encouraging. Moving to Slide 8. I'm happy to report that IHH has shown a strong performance across all markets in Q2 on a year-on-year basis. However, I'd like to qualify that Q2 2020 last year was, of course, a low base because of major lockdowns and restrictions due to COVID-19. Patient volumes have picked up. We have introduced a lot more COVID-19-related services as the pandemic continues. With that, let me now pass the time over to Joerg to speak on the returns and capital efficiency on the next slide.

Yes. Thanks a lot, Kelvin, and welcome, everybody, this morning. Let's turn to Page 9, capital efficiency ratios. And look, it's pretty obvious on this page. We've achieved 7.2% return on equity. I guess if you do the math, you will see that this is likely a little bit higher than where we would see a run rate ROE range. But what you do notice on this page, there has been a structural shift in terms of equity performance. We show steady returns since the height of COVID in Q2 '20. Strong recovery -- in fact, if you look at the second quarter, we've surpassed the initial targets we've set for ourselves. And it highlights the doubling ROE from a low last year was a waymark. It was a stepping stone to then think about where should actually our long-term ROE and ROCE target be. Our net debt ratio -- debt ratios have improved, which shows extremely strong cash generation during this period. And I want to thank all our hospitals and all our operators out there for being diligent in terms of our working capital buildup, in terms of inventory buildup and in terms of CapEx spending and be really prudent and spend what is needed but to keep themselves in check in terms of what would be, of course, desired. So that's really a strong thing. One comment here. We've changed the net debt definition to include lease liabilities. I think that's more market standard [ in terms of this ]. The next page, a quick picture on how are we diversified. In terms of market revenue contribution, Singapore, of course in revenue and EBITDA, remains the strongest contributor. We see Malaysia with a strong, nearly 20%. We see Turkey and Europe, which basically gives us nearly 30% profit contribution. India is now clearly in a strong position of contribution in terms of EBITDA and revenue, so a really nice popular picture. And you will see later on in Turkey, really happy to see a very strong EBITDA performance that has led the business to be net income positive and return bottom line contribution to the company. And let me pass back to Kelvin to look for further operational highlights.

Thank you, Joerg. Please turn with me to Slide 12, where I'll take you through some of these operational highlights. From last month in July, we extended our strategic collaboration with PLife REIT to extend our lease agreements for our 3 hospitals in Singapore. As you know, these 3 hospitals are located in the prime locations of Singapore and are our top performers for the group. So we are very pleased to be able to extend the lease agreements as it means business continuity and, of course, operational stability. The rent is well in line with prevailing market rates, and we do not foresee any material financial impact to our profitability. We are also getting SGD 150 million in upgrades to our facilities, which will be provided by the landlord, and it will help us enhance the already top-notch service offerings, the offerings we are known for. If you can turn with me to Slide 13. I would like to take this time to briefly introduce our IHH lab business, which may not necessarily be familiar to all. And we want to develop this really large business to be one of the world's most trusted medical laboratory services network. You can see our lab services already in the countries that we operate, leadership positions in many of these countries by revenue. And in fact, for the first half of '21, the lab revenue from this entity was at MYR 975 million. Ownership in SRL Diagnostics, of course, is indirect via Fortis. Now the reason why I like to highlight this because labs are really at the forefront of our fight against COVID. On Slide 14, you can see that we have provided more than 7 million COVID-19-related tests in 2020. This is going to be an essential and important service moving forward for us with all the testing that's required across the markets we operate in. And we believe that beyond just COVID-19 services, our lab business has a high trajectory of growth going forward as well. I will now pass the call to Joerg to run through the operational performance.

Let me just quickly comment back on the lab business. Look, this is a very strongly growing operation that we have. And this is not just COVID-related. We see the teams invest a lot in new test methods, in CapEx to really grow the underlying core business. And look, with -- we had MYR 1 billion in revenue contribution in H1, and we have not made the step yet to a full segment disclosure. But I guess starting next year, you'll see us disclose a lot more about the lab business margins well, well north of 25% average for our hospitals. So a very attractive, comparatively lower CapEx business, so a real focus area for us, and you'll hear us talk about this a lot more. On Page 15, you'll see that inpatient admissions have increased year-over-year basically across the board. However, we are not back to a pre-COVID period. And I think this guides a little bit the watch-out that I would like to put on the second half year. We are clearly -- if you look at the inpatient operations behind where we have been pre-COVID now, that's, of course, a good news because it can create additional growth once patients return back. So we really do have a runway there. But at the same time, I think we need to be cautious in the near term in terms of cost buildup, in terms of potential headwinds that come. So we are a little bit -- we are, of course, optimistic with a great quarter, but we're a little bit cautious on the second half year. I think you should not just take H1 and multiply it by 2. That may leave us a little bit too much on the high side. Foreign patient volume in key markets, such as Singapore and Malaysia, remain low. We have just come off a call with our Malaysian CEO. The situation is not easy with our friends and colleagues there. And we really support everyone on the ground to fight through this. But coming back to medical tourism and patient volumes, I think we need to be realistic. This will take a little bit longer time for recovery. It requires global vaccination programs to really take effect and international travel to resume so that foreign patients can return back. In the second quarter, revenue intensity has continued to rise. And look, we've all understood this by now. A lot of this is, of course, a mix effect. You have high-intensity cases staying with us during this period at this stage and lower difficulty cases. They just don't show up at a hospital, and that is then leading to an increase in check size. So I think we should not interpret too much into that. If we go on the next page, Malaysia. Despite the MCO, which Malaysia has implemented from January, we delivered better performance with a low base in Q2 '20. Of course, revenues improved 53% to MYR 662 million. We've included here now Prince Court Medical Centre, and we've increased the contribution from our COVID testing, vaccination programs. And the team is really doing a fantastic job in managing all this while being really careful and cautious on cost management topics. On the next page, in Singapore, very strong business, continuously strong, plus 94% in EBITDA. Of course, Q2 last year was really a difficult quarter, but also EBITDA margins, plus 6.6% at 34 percentage points. Inpatient admissions increased 22%. Revenue intensity grew -- continued to grow. Revenue is now at MYR 1.3 billion in the quarter with strong bottom line contribution. If we go to the next page, Turkey and Europe. And this is where I really want to put a call out on the team in Europe and Turkey, very strong recovery after the Q2 last year. And you see this already in Q1. We saw a strong return of international patients while we had very strong COVID-related activities. So we saw revenues improved 72% to now MYR 1.1 billion. So welcome to the above MYR 1 billion club per quarter. That's fantastic. EBITDA increased to MYR 300 million. Inpatient admissions increased 49%. And look at the bed occupancy rate here at 78%. These are pre-COVID levels. So really strong performance and we are all hands out to the team there for doing a fantastic job. And look, I mean, as a corporate, it's always good to see a large division return bottom line contribution. So that's really great. The currency topic has been an overhang for a long time. The team has hedged almost all of the loans or foreign currency loan exposures. So that part is behind us, but the team has done a lot more than that and has been able to grow the international business contribution. We are showing here 3 parts of the business. One is the domestic patients, which, of course, still is the largest part of the business there. But then we look at foreign patients in Turkey, which is foreign currency business, and we look at the European operations, which is also foreign currency business. So out of the overall revenue from, let's say, 2017, 75% being basically Turkish lira-denominated business, we are now at 40% foreign-currency-denominated business. And this trend continues to grow with the expansion plans that the team has in Europe, so really a strong natural hedge that we are building up here while -- and we should not forget this, while a large part of the cost base is still in Turkish lira. And I think this is where the real performance improvement is then coming from. If we go to India, strong recovery already in Q1, Q2 continue. Now we have nearly 70% bed occupancy rate. Revenue grew 133% to nearly MYR 1 billion on contribution. Of course, India also went through a difficult COVID period. And yes, there were a lot of COVID-related activities and services that the operations have provided. EBITDA rose to MYR 188 million. Inpatient admissions rose 46%, and revenue intensity increased 48% as patients with more serious and urgent ailments or treatment at our hospitals. And look, you see the Fortis market performance, which is, of course, fantastic. We love to see that the shareholders -- to see a business do so well, so really happy on that development. And then another great news on the next page. Hong Kong has achieved EBITDA breakeven in May as per plan. We have increased since then. And we see the team shifting the discussion from an EBITDA breakeven business review theme to a net income breakeven review theme. So we started to set up plans on, "Okay, how can we get now from an EBITDA breakeven which we have achieved? How can we continue this growth trajectory and get to a net income increase?" So we're super excited. The Hong Kong team did really well. The business continues to ramp up. We saw revenue increased 46%. EBITDA losses narrowed. And as I said, in May, we were EBITDA positive, so really great performance there. Let me give, of course, one comment on something else that you saw in our financials. We have, of course, looked at the assets in China. And the key message there is China is a super attractive market. It's a great market also for private hospitals and for private health care providers, but we have to be realistic. It is a market that takes a lot more longevity and a lot more breadth to really ramp up the operation slowly. We do see improvement in our clinics. We see some improvements in our clinic -- in our hospital in Chengdu. We see progress in the hospital construction in Shanghai. However, we, of course, work with our auditors. We have hard-nosed accountants in the team, and they have advised us to look at this a little bit more carefully. And we've decided to take an impairment hit on some of the assets that we have there. I think it's just prudent in terms of managing our balance sheet and balance sheet risk going forward. And with that, I pass back to Kelvin for sustainability.

Thanks, Joerg. So on Slide 23, you can see here IHH's 3-pronged sustainability strategy, covering critical areas, involving opportunities for growth and learning for IHH to achieve economic, environmental and cultural sustainability. On Slide 24, you can see MSCI had improved IHH rating from BBB to A. Going forward -- we won't stop here. There's more we can do in the sustainability space. There will be -- we will step up our efforts to lock in our long-term sustainable business. Our ESG drive will be aligned very much to, of course, our presence as a global health care player. We are already pushing forward and leading further topics around value to patients, for example, making sure that the clinical outcomes are great, at the same time making sure that it is delivered to our patients at the right and best possible value for them, for example. So to wrap up, what we have discussed are here on Slide 26. We have been on a strong recovery trend since June of last year actually, where we took the brunt of the impact in Q2 last year. And then there's been recent resurgences in cases -- resurgence in cases in the markets we operate. And so therefore, there could be some near-term headwinds. But we will maintain a discipline in executing our refreshed strategy. We will stay nimble during these times as the pandemic evolves. We will continue to proactively deliver on our core strategic pillars that I've talked about before. We have now set, along those strategic pillars, targeted strategies for each market to ensure and sustain our earnings growth. Further, we will create new revenue streams, as we have mentioned, for example, around our diagnostic services, particularly our laboratory business. We look forward also to developing other sustainable platforms, especially the digital platform, where we'll create a seamless online to off-line service to our patients. That also helps us to, of course, respond to this new post-pandemic world. So with a healthy balance sheet, strong cash generation, we are well positioned to ride out the pandemic short-term headwinds, and we believe our long-term growth trajectory remains very much intact. With that, thank you so much, and I'll pass the call back to Penny.

Thank you, Dr. Loh and Joerg. We will now take your questions. Just a quick note before we start, we'll first take questions from the participants on the conference call then before moving to the questions raised from our webcast participants. [Operator Instructions] And with that, operator, can you please proceed with the Q&A? Thank you.

[Operator Instructions] Your first question comes from Rachel Tan of DBS Vickers Research.

Congratulations on a very good result. And finally, we have seen Gleneagles Hong Kong has achieved EBITDA breakeven. Probably just 2 questions from me. I think in the presentation, you have mentioned that you are a little bit more cautious on the second half of the year. I was just wondering, given now we are almost the end of third quarter, what are some of the things that probably was very strong in the first half but probably not so sustainable in the second half that warrants the cautiousness as I think COVID-19-related services would likely remain in the second half?

Thanks, Rachel. A very good point. Look, I mean besides being generally cautious, I think there are a couple of points that we should be realistic about. We have had and we have seen cost favorability in the first half year that we don't think can be maintained in the long run. We have had difficulties in hiring sufficient staff here in Singapore. The labor competition with actions by the government to increase pay is also something we have to respond to. We need to be fair to our frontline workers. So there is cost coming back into the system that was not there in the first half. I think that's one part. I think the second part is that we see, especially in India, a very sharp drop in COVID-related services and a rebalancing back to a more normalized business. But without the international tourists, I think there is a little bit caution that we want to have there as well. And I think overall, we -- even though you're right, we believe that COVID service -- testing service -- and maybe soon, we have to call them differently, no longer COVID service but more like general mobility support or something. They will continue. That's clear. Now will they continue at the growth rates? And will they continue in the magnitude that we saw in the first half? I think we have to see that. So we do give a little bit of a cautious watch-out for the second half. I mean look, don't misunderstand me. We're not going to fall off a cliff. That's absolutely not what's going to happen. But I just caution a little bit to take the first half and multiply it by 2. I think that would be a bit too simplistic.

Got it. That's very clear. My second question is on -- I think you've given some color on your lab business and it seems like it's a very interesting business. Any thoughts of spinning off the lab business as an individual entity?

Thanks, Rachel. I think it's premature for us to comment on that. For now, we just wanted to mention that for us, we have a very -- firstly, a very large laboratory network already, as shown on the slide. And secondly, we intend to drive that business because there's a different growth dynamics as a superior return on equity dynamics. And therefore, we see looking and driving that business growth in a whole new way going forward.

Okay, okay. Maybe if I could follow up. What are some of the consideration of having it as internal or spinning off a separate business?

Yes. Actually, for most of our markets, home markets actually, internally, it is already a separate business entity. So for example, in Singapore, it's called Parkway Laboratory Services. In Malaysia, it's got Pantai Premium Pathology. In Turkey, it's called Labmed. And these companies are -- in effect, they are not serving only our hospitals. They're also serving the external market as well, which continues to grow.

Your next question comes from Shyam Srinivasan of Goldman Sachs.

So the first question is just on the recovery of the non-COVID part of the business in the hospitals. I think Joerg mentioned, I think, Acibadem seems to be already back to pre-COVID. But I just want to understand the rest of the geographies, where we are. And given the kind of cautious tone on admissions, I thought not necessarily the entire business, what is the COVID occupancy in our hospitals, which might probably come off in the second half, so that we can get a sense of what is the non-COVID versus COVID occupancies?

Sure, Shyam. Thanks so much for your question. Good to hear from you as always. So let me give you a sense. It's somewhat different in different markets. So the first part of your question that relates to how has the rebound been in terms of non-COVID services, Turkey, you saw certainly, both the foreign patients as well as domestic patient has come back largely. That's also -- in Singapore, the domestic market has largely returned to pre-COVID levels. In India, it fluctuates because the situation there is really -- is actually much more volatile. Whenever there's a big COVID spike, the non-COVID patients go down. But when there is -- the COVID spike goes off, then the domestic volume signs back dramatically. I wouldn't say that it's back to pre-COVID yet, but as I said, the domestic market has substantially -- has come close to pre-COVID. In Malaysia, in a situation where you see the COVID outbreaks are still not in completely controlled situations, such as Malaysia, then you can expect that the non-COVID volumes are not fully returned. With regards to what is the COVID occupancy, it is fair to say -- and I think that's what Joerg was alluding to. In terms of COVID occupancy in Q2, we certainly saw a big boost for India. But again, I dare say that as soon as that melted off, we saw a very quick return in non-COVID cases in India. Other than that, we didn't have much COVID inpatient admissions in, say, for example, Malaysia and Singapore. The overall COVID-related revenues, I think we had it on another slide. That was -- yes. That was one of my first slides actually. So you can sort of get a sense from that. Does that help answer your question?

Yes. Look, still that doesn't split out a lab versus hospital, which is where the challenge was.

They're differing largely to the hospitals in my comments. With regard to labs, it's fair to say that the labs get -- continuing. They are non-COVID work. The non-COVID part of business, of course, in a way, goes up and down to some extent with what you would see in the hospitals. But the COVID work in the labs have grown and continue to grow through all this time. And I'm generalizing that for our markets. So we don't see that going up and down so much because obviously, the labs are still very much involved in testing, right? Testing doesn't go away just because the surge has come down, and that will be true in all our markets.

Got it. That makes -- second question, just I think Joerg has alluded to the share price of Fortis, how it's done. In the next month, I think Fortis management has indicated the final Supreme Court order is going to be out. So how are we looking at our stake there? I'm asking a hypothetical question in case the open offer gets released by the Supreme Court. That was at 1 70 3 years back. Stock today is 2 80. What do we think about taking a stake up to, say, historical levels we have seen in the Indian hospitals, like Global and Continental that we have had?

So firstly, indeed, the Supreme Court has concluded its hearing as of 1st May, but I think we cannot predict when the MTO will begin. Of course, we are hopeful for a positive outcome soon. Per our legal advice, we actually have no obligation to revise the MTO price. We will, of course, await the outcome per the SC order, and we will consider the options from there. I think it's worth noting that we currently already hold a 31.1% stake. And we, of course, already have majority control of the board and we are consolidating. We are very happy with how profit has performed so far, continuing to grow well.

Your next question comes from Divya Gangahar of Morgan Stanley.

I have 2 questions. The first is on Singapore. I wanted to understand what is the contribution of border screening and on-arrival testing to the entire COVID revenue that you've given on the slide? Just wanted to understand what the portion coming from border screening and on-arrival testing specifically is because I guess that's going to be more sticky compared to the COVID treatment and vaccination. So that's my first question.

I don't think we have a split out here specifically with regards -- the overall Singapore, 24%, of -- Q2 '21 revenues, 24% of that was COVID-related. The -- I'd say that the border screening and on-arrival test probably make up about half of the COVID revenue.

Okay. Got it. No. That's very helpful. My second question is just on Turkey and the Hong Kong margin. So in Turkey and Europe, we've seen that the margin in this quarter had gone up quite nicely. The EBITDA margin is over 28%, which is sort of the highest we've seen in recent quarters. Just wanted to understand what's driven the margin improvement there? Is it just operating leverage and scale coming through or the way you commented on the first half not being a good representation for the second half as costs come through? Could you comment on Turkey in particular, whether these margins are a bit more sticky?

My answer is overall, I think so. Maybe I'll ask Evren to help up. Evren, are you on the line?

Yes. Sure, Kelvin. I think the response lies with the performance in twofold in this quarter. If you look at the first half, particularly in April, we have relatively higher COVID exposure, which kind of started to melt down towards the end of the quarter. We have specific example. 14% of our April revenues came from COVID versus our COVID contribution was only 4% in June. And then we were still able to deliver the similar EBITDA margin in the same month versus April, which is a very good example of we have more of a -- more sustainable margins. And the reason that's coming from multiple factors, obviously, domestic patients coming back but we also have very strong recovery and improvement in our COVID inpatient volumes during the COVID and it's been increasing consistently. So that also helps out in more streamlined margins. Thank you.

Could I clarify that when you made the comment on COVID, is it that COVID is typically lower margin? And despite the lower margin in April, the margins were the same? Like I'm just trying to understand the contribution of COVID, how that impacts margin.

So COVID in Turkey is relatively higher margin than non-COVID. And then in April, we had 14% of our revenues coming from that business line. But even though that COVID business scaled back in June, we were able to deliver similar margins because of the reasons that I just explained.

I see. Yes. Okay. That's actually very clear.

Does that answer your question?

Yes. That's very clear. And just on the Hong Kong merger, I just wanted to get a comment on -- you said you're focusing on net profit contribution going forward. Any new time lines you can give plus how you've seen the business ramp up? I mean is Hong Kong going to be more like a -- I mean when do we get to like Singapore or Malaysia-style margins? I mean what kind of time period are we looking at?

I think let's just say that we believe the Gleneagles Hong Kong business, the early period of gestation and I would say the heavy lifting part that -- build the brand, get doctors and patients in, I think that's largely over. We are in a phase where we expect the trajectory to be more on an upward incline. Might be premature for us to give guidance with regards to when, but it's certainly quite positive with regards to its growth trajectory from here. As you know, hospitals work in such a way where the overhead costs sort of come pretty far upfront. And once you get past that, then a big part of -- most of the revenue is just contribution margin, right, which is 70-odd-percent range. So we're excited about this business. We expect it to move forward strongly. Of course, there could be some near-term headwinds with regards to COVID and the degree of social movement restrictions in Hong Kong that may hold back its ability to charge forward, but otherwise, I think it's come of age.

Right. And just to just ask on that. I mean occupancies are already at 61%. Typically, when hospitals reach over 60%, 70% occupancy, they start making good money. So just based on past experience, like how long does it take to get to normalized levels once you've broken even? Is it 3 years, 4 years, 5 years? Just to get a sense based on past experience.

So the bed occupancy we have been reporting is as a percentage of open beds, which is -- currently stands at -- for Q2, it's 61% or 194 bids. It's not so useful to read that, let's say, in isolation because we keep opening beds in Hong Kong as we find that it starts to build up capacity, we keep opening beds. So you'll find that the bed occupancy may not be good. The bed occupancy percentage may not appear to grow but in terms of average daily census, that's continuing to grow.

Your next question comes from Sean Chew of RHB.

Can you hear me?

Yes, we can. Go ahead.

Yes. So firstly, mainly on Malaysia, would you be able to provide a little bit more color on Malaysia's quarter-on-quarter growth despite the imposition of lockdown during that period? Was it mainly driven by cost containment measures? Or is it patient flows being undeterred by the restrictions?

So most of the growth in Malaysia -- quarter-on-quarter meaning from Q1 to anyone -- to Q2, referring to previous year quarter?

Yes, Q1 to Q2 for the year 2021.

So that's been largely continued growth in patient volume. So in the -- what we see in Malaysia, since that impact of COVID, is that we're seeing quarter after quarter of progressive improvement in volume growth. I would say -- as I mentioned earlier, it's not fully back to pre-COVID times in terms of the non-COVID volumes, but the growth has been progressive a bit, I guess somewhat affected by the recurring COVID situation in Malaysia.

Got it. Just a follow-up. What was the percentage of inpatient volume for the second quarter has actually contributed from decanted patients from public hospitals?

Relatively small because you would -- I think the admissions of COVID patients at the private hospitals started pretty late in the quarter. So overall, the impact of the -- I think it was quite small in terms of actual inpatient.

But would you expect this contribution to grow in the third quarter given the [indiscernible] value?

So that is -- it appears to be because we started taking more patients in the hospitals. We have announced that we have set aside about 250 beds for COVID to help out. As we speak, probably about half of those beds are in use.

Okay. All right. Maybe perhaps a final question on India. Just wondering if there's any potentially receivable risk or late payments coming from the COVID situation?

No, not really. Our collections actually have been doing quite well. .

Okay.

Thanks, Sean. Next question...

So we reached -- I mean just to the topic on receivables, of course, this is always a risk in such crisis periods. And we have, together with the country CFOs and the country operations teams, established a much more rigorous review on accounts receivables, on critical overdue situations. And while you do see the one or the other small case that happens, there is no trend that there's any delinquencies or an increase in overdues or any risk in that area. So the teams are doing a really good job to keep AR under control.

Your next question comes from Amanda Foo of Credit Suisse.

Congratulations on a good set of results. I have a few questions from my end. I think, first of all, Joerg, if I could find out a little bit on your ROE, I know that you've cautioned during the presentation that second quarter is slightly higher than the current -- than their normal run rate. Can I check then -- under the normal run rate, would that have already crossed or surpassed the initial target of 5% to 6%? And given the recent developments, is there a refresh target for management to work towards? And what could the longer-term ROE kind of look like for the group?

I think very good observation. I think structurally, we are above the 5%. And that is mostly a function of really CapEx prudence and the underlying earnings improvement in our business. I think we are in the range of above 5%, 5% to 6% structurally. We've not discussed a long-term target -- a new long-term target yet. I think it's a little bit too early to think about that. But of course, if we can, at one stage, consider something double digit, that will be great. But I think it's a little bit too early to talk about that.

Okay. So I guess if you can take it that going forward, a 5% to 6% ROE should be achievable, barring unforeseen circumstances, right?

Yes, yes.

Okay. And I wanted to find out a little bit more on your labs business. Which markets are the larger contributors right now? Would test volumes be a fair indication in terms of their contribution? And also, I believe during the Q&A or the presentation, Dr. Loh did mention that the existing labs are also servicing the external market. So what would the rough split be for the internal and external markets?

So I mean the test volume, of course, is a good indicator, but you'll quickly recognize that the -- of course, it has a currency effect, different absolute price point with currency effect in the different markets. In terms of the percentage split, I think suffice to say that in all our markets, we are now looking forward to -- I think it's fair to say that in general, especially our core markets such as Malaysia, Singapore and even Turkey, I think it's fair to say that for now, the larger chunk or the bigger predominance of the lab business is from our own businesses or hospitals, but that is certainly growing quite rapidly.

And if I could follow up on that, would it then be fair to assume that probably Singapore will be one of the larger contributors to your labs business or...

Yes. I think it's fair to say that.

Okay. So they are probably the largest at this point, right?

I think if you look at revenue, you would have SRL in India with a much broader footprint is, revenue-wise, certainly the largest, and then Singapore would be the second largest, yes. But look, let's focus more on the total lab business disclosures and, at this stage, not so much at the individual dissecting of where this comes from. I think we're super happy that we've come to a point where we want to disclose our lab business. It contributed MYR 1 billion in the first half year. EBITDA margins are well, well north of 25% average for our other hospitals. So I think this is a really great business.

Thanks, Amanda. Maybe we quickly take the questions from our webcast and it came -- it's coming from Nicole, UBS. So first question, what was the Prince Court contribution to Malaysia's revenue and EBITDA in Q2 '21?

So Prince Court quarterly revenue contribution is about MYR 65 million.

We move on to question #2. What is Q3 looking like? Are you seeing return of non-COVID patients especially in Singapore and India?

So the quick answer to that is yes. And I took pains to explain just now that we do see growth of non-COVID patients across all markets. It's just that the rate at which that bounces back, we see that differently. And in India, we see that really strong dynamic. It comes back really fast. Whenever the COVID surge goes down, the non-COVID patients bounces back really fast. In Singapore, we see that progressively coming back. In Singapore, our domestic volume has already returned to the non -- to the pre-COVID times. It's just that the foreign patients has not come back, of course. When do I expect medical tourism to return to Singapore? We don't know. I think it's -- suffice to say that borders reopening will be -- there'll be a cautious stance towards that. And who knows? Hopefully sometime next year. I'm not so sure if it happened within this second half.

Thank you, Dr. Loh. Operator, we can turn back to the questions from the audience on the call.

Your next question comes from Rachel Tan of DBS Vickers Research.

Sorry. I have a few more questions. Just maybe just to understand on the Gleneagles Hong Kong's ramp-up. I think occupancy has been quite stable at 60%, and you are likely going to open more space. I'm just wondering, moving forward, in terms of your plans to open more, will it push EBITDA back to losses of gain or there will be minor contribution from EBITDA profit until Gleneagles Hong Kong becomes more stabilized?

The answer is option B, the -- which we probably run our hospitals. We try not to make it lumpy. So we try to ramp up [ the entire asset ] with the EBITDA -- with the growth.

Okay. So contributions will start off low first line and then slowly will move up a little bit more profit as an EBITDA...

Yes. We expect the EBITDA to grow from here, not to take recurrent [indiscernible] if that's the question.

Okay. Got it. Yes. And my second question is on the European business. I think this time around, you've seen that European business has been growing. Is there a target for -- to grow how -- the European business bigger? And with that target, are you looking to expand more in Europe rather than in Turkey?

So there isn't a fixed target per se, but let's just say when we talk about the European business, I guess we can think of it in 2 components, right? One is the foreign market that comes into Turkey. We, of course, want to grow that. It is growing well, Acibadem a very strong brand drawing foreign patients from Europe as well as outside Europe. So definitely, we want to grow that. In terms of the [ big hit ] that the brand has launched into the European markets, i.e. operations in those countries itself, we'll progressively grow that in a capital-efficient way. As we gain more and more experience in operating there, I think we want to continue to grow. We have done very -- we've done so very successfully, gone as far as one of the newest hospitals that we opened in Amsterdam that has done very well. In fact, we're looking to expand that hospital now. We also, as part of that whole cluster there, just acquired a hospital in Serbia well.

Okay. Just on Turkey -- just a follow-up on Turkey. I noticed that on a net profit level, they seem to be contributing already. I'm just wondering whether your finance costs and with the limited product fluctuation exposure now, should we -- is this like considered a normalized level for you for the Turkey business?

So we're looking and reviewing the finance costs for Turkey. It's, of course, high, Turkish lira denominated at this stage. And we are looking at this, how we can improve from here. And you'll see those discussions come through in the next couple of quarters.

Okay. Sorry. Maybe just one last one from me. Just on the Chengdu impairment, could you give more color on that impairment? And would there be opportunity to write back those impairment once Chengdu is back on its feet?

Yes, look. Write back is a fantastic -- if that would be a possibility, then accounting-wise, let's look at that once the business comes back. I think it's really more a mathematical function of looking at a DCF model in our impairment tests and coming to the realization that the ramp-up stream, it just simply takes longer. We do believe in this business. It's a good business, but it takes longer to build a brand of patients, get doctors. Look at Hong Kong. Once we started to get really good doctors and build a reputation for ourselves to offer services, suddenly, you do see it becomes like a magnet, but this takes time. And in China, our experience is it will take a little bit longer time there. So we just said, "Look, from an accounting prudence perspective, we cut off the DCF model at one stage. And if it then doesn't carry, then let's write this off." Is there an opportunity to write it back? Well, let's take this quarter-by-quarter.

Okay. Maybe based on your estimation, would you be able to give us like roughly a time line in terms of how much more expansion of ramp-up for Chengdu have you estimated in the number?

In terms of how many years for recovery?

Yes.

Look, I think you're not talking in quarters. You're talking in years, right? So if you look at other hospitals -- and we've done some benchmark studies, people do talk about 4, 5 years to break even and in some cases, longer. This is a big hospital. I think we need to be realistic. So I think we should not be overly aggressive in assuming that there's any magic stick happening and then there's a pop, yes. This will likely take quite a long time.

Thanks, Rachel. We've quite a few questions that's coming in from the webcast. And I think -- let us address some of the question from the webcast and then I think we're running out of time. And I think with the rest, we can take it -- the discussion with IR directly. So to the first other question on the webcast. Hi, Dr. Kelvin and team -- which is from Alan, RHB. May I know what is the driver behind the improvement in ESG rating from A -- to A from BBB? And how has COVID-19 changed the landscape of ESG for IHH? I think I could jump on the first one, and then Dr. Loh can take over the second question. I think in terms of the MSCI rating, where we saw the improvement was maybe -- so first, data improved in terms of like data security disclosure and anticorruption measures that IHH had disclosed. And obviously, that was first to do drive the upgrade. Secondly, obviously, I think as the MSCI team continue to look at our product offering, I think that's where we continue to showcase a very good product offering as well as continue to uphold our clinical governance and standards. So that's another factor that drove the increase. So I think that answers question #1.

So how has the COVID-19 changed the landscape for ESG for IHH? Long-term trajectory, I don't think so. We are very much committed to driving value for our patients, helping out communities. And of course, the topics around waste management, [ which ] have been all very important topics for us. I'd say that the biggest acceleration that has come about is really the public-private partnership. Personally, I am excited about that opportunity. COVID-19 accelerated that, given us a perfect chance to partner with public sector better, help with this huge spike in health care demand, right, brought upon by COVID-19. No one sector by itself, whether public or private, can [ hope to kind of use ] demand, but that kind of a collaboration that has come about, I think, brings a lot of value [ for our patients ].

Okay. The next question, from Pham Mai from CIMB. There is a MYR 224.8 million income from India. Can you share with us where does this come from? Maybe I'll address with you directly because I'm trying to determine where is that MYR 224.8 million income that you're referring to. So let us come to you on that question separately, all right? And then we'll jump to the last question from [ Lee Song Yang ] from Morgan Stanley. From the earlier answer on Turkey, COVID margins are higher than non-COVID. If that's the same for Malaysia and India, we would like to understand how the change in Malaysia and India easing of COVID affect margins in second half?

Yes. I think a very good observation. And I think the way to look at this is that a lot of the COVID business is an incremental marginal contribution without adding a lot of overhead costs or other staff costs. So there is some increase in some dedicated staff cost, but a lot of times, the COVID activities and business is using existing infrastructure. So your marginal contribution is indeed higher than the hospital business. This is the case in India and Malaysia, not as much in Malaysia. It is more separated. So I don't think in Malaysia, you will see a major difference. But in India, for sure, there is some of that similar effect. And look, you've heard me talk about the second half year. We're very excited about the second half year. We're -- we think there's a lot we have going in our direction, but we need to be cautious. We need to remain cautious. We're in the middle of a pandemic. And I think it's good to assume that some of the favorability that comes through this business may not be there in the long run.

Thanks, Joerg. Maybe I can quickly address the question that Pham Mai had given earlier. I think where the income of MYR 224 million came from. I think -- I believe you could be referring to the -- under the exceptional item is where there is an MYR 85.8 million from remeasurement of the fair value of interest in a joint venture. I think that refers to that DDRC SRL remeasurement of fair value. And the second one is the gain on disposal on -- of a joint venture of MYR 139.1 million. So that refers to the disposal gain of Apollo Gleneagles, all right? I think that we are running out of time. So I would like to thank everyone for joining us on the call today. And if you have any further questions, feel free to reach out to us at IR via e-mail [email protected]. So with that, we'll now conclude the IHH Healthcare Second Quarter and First Half 2021 Financial Results Call. And thank you for joining us today. Operator, you may disconnect.

Thank you.

Thanks, everyone.

Thank you.