IHH Healthcare Berhad (IHH) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Third Quarter and 9 Months 2021 Financial Results of IHH Healthcare Analyst Briefing Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 30 November 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 third quarter and 9 months 2021 earnings call for the period ended 30th September 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; Mr. Joerg Ayrle, our group CFO. We also have our colleague, Evren, who's the Head of Strategic Planning and Investments from Acibadem. For those of you on the webcast, you will be able to view and download our presentation slides and press release. The materials are also available for download on the IHH website. As for the sequence of events, Dr. Loh will share with us the key highlights and overview for the third quarter. Thereafter, Joerg will provide the Q3 financial results highlights before Dr. Loh wraps up with operational highlights and outlook for the group. We'll have a Q&A session after the presentation. So with that, I'll turn the call over to Dr. Loh. Dr. Loh, please.

Good morning, everyone. Thank you for joining us, and I'm excited to be here with you at this analyst briefing for Q3 2021. Now before we start with the results details, I want to once again thank all our frontline staff for continuing the good fight, helping the countries that we serve fight this pandemic. This COVID-19 is still an evolving situation. As you can see on the slides here, we continue to provide COVID-19-related services to varying degrees in our different countries of operations. In some places, as we go into the endemic situation where we live with the virus, there's actually been an increase in COVID-related services such as you can see in Singapore, and to some extent, in Malaysia. Conversely, in a place like India, where it appears that they have developed a significant immunity and resilience, that has come down. And you can see that quick drop-off in COVID-related services in India. Somewhat similar as well in Turkey. So you can see here that we are now -- we have evolved our operations in such a way that we are nimble and agile to respond to the fluid changes in this pandemic or endemic situation. Q3 '21 results on Slide 5. First off, you can see here from the trends since 2019. From the very beginning of the pandemic in 2020 Q1, you can see a continued sustained recovery in our revenues and also in our EBITDA and earnings. You can see on the earnings or net income line that the P&L structure has also improved. Despite that evolving COVID-19 situation, you can see here the net income for the last few quarters consistently hovering around MYR 400 to 500 million mark. For Q3 '21, year-on-year revenue growth, 26% to MYR 4.4 billion; EBITDA, 32% to MYR 1.1 billion; and net income grew 77% to MYR 550 million. So with that, let me pass the time to Joerg to do a deeper dive on the financial results.

Yes. Thanks a lot, Kelvin, and happy to be here with you today. As you have seen, it's a continuously good quarter. We've reached MYR 4.4 billion revenue in Q3 2021. That's a 26% growth compared to prior year Q3. We've achieved MYR 1.1 billion in EBITDA, 24.7%. That's around the average we have for the year of 25%, 32%, up from last year. And of course, both are strongly driven by, in one part, returning inpatients, especially in Fortis in India and in our European operations, and of course, also driven by growth that we see in the pandemic services that we provide here in Singapore especially and in Malaysia as well. We have, of course, in Malaysia, not yet returned to the inpatient situation that we had before, but we'll have a little bit of an update on that later on in the deck. We've reached 8% net operating income without extraordinary items of MYR 355 million. Our net income reported grew to MYR 550 million. That's up 77%, 12% reported. There is a little bit of a special item in here out of Turkey. We have a deferred tax asset that we've been able to book in Q3, clearly a onetime item. And so I guess we prefer to focus on the net operating income. In our revenue numbers, we have MYR 640 million in pandemic or COVID-19 services reported. If you look at the net operating income, you see a little bit of a dip compared to Q2 2021. And I guess I had guided towards this already in the last quarter release. There is, of course, a little bit of a softening, especially for pandemic services that we have to expect. There's a little bit higher competition. Some services are just no longer required. So there's volume drop here, and it did lead to a somewhat softer Q3 compared to Q2. Year-over-year, still plus 50% net income. If we look at the next page, looking at capital efficiency ratios. Look, we continue our path on return on equity improvement with strong earnings. Steady returns, we're now at 8.2%. Underlying is likely closer to 6% if we normalize completely our COVID-related or pandemic services. But if we look at new variants coming out and if we look at the dynamics in our business, the Turkish lira being depreciated over the last weeks. Again, the message is clear. We need to remain agile. We need to remain flexible, to adapt to whatever comes, capture opportunities and remain resilient in those operations where revenue has not come back yet. Debt ratios are improving since Q3 '20. We're now at 1.58 net debt to EBITDA. We're at 0.24 net debt to equity. In Q3, we've earned MYR 900 million in operating cash. So you can see we still are pretty resilient around the CapEx discipline, which is really appreciated. And looking forward on the map, as we've shared with you before, we're continuously looking at our portfolio. And you should not be surprised if you hear in the next couple of days and weeks, maybe not very large actions, but smaller actions that we do in order to resolve some legacy topics and improve our ROE journey further. So don't be surprised if there are some smaller nuggets coming out. On the next page, just 3 highlights that I'd like us to really appreciate because there's an enormous amount of work behind each one of them. Turkey, we've solidified our FX exposure in Turkish lira through cross-currency swaps, and that's compared to an FX loss in 2020 of MYR 190 million. We see Acibadem today contributing 28% to our EBITDA. It is very net income accretive to us and a good -- has turned around its net income contribution. And in the Board of Acibadem, we are now discussing about path to dividend payments, which we've not finalized yet because the business is growing. There are a lot of opportunities, especially in Mainland Europe, but we are discussing around dividend distributions out of this great operation in Europe and Turkey. And I think there is a lot more European growth that we can expect, and we are encouraging the team to look more into investments outside of Turkey in the European heartland. India, amazing turnaround story in Fortis. I think there is a really fantastic collaboration, and Kelvin and I, we sit on the Board of Fortis, have good discussions every month with management there on the Board. Great relationships. And of course, the numbers are really outstanding. Share price of Fortis, of course, has also improved, which we appreciate. And what did this, on the one hand, we had more patients coming back; on the other hand, the team took out USD 15 million in costs compared to prior year annualized. And we have a similar grade cost saving in our own hospitals in India with a $10 million cost reduction that we have from there. So very strong response in strengthening the business in India. In Gleneagles Hong Kong, we have reached EBITDA breakeven since May. We have remained EBITDA positive since May, and we've grown our EBITDA sequentially. And we are now discussing a net income breakeven in 2023. If we exclude shareholder loans and consider them as equity replacing, we are well in a positive net income zone by 2023, which will then turn around this hospital to be a real earnings contributor. We're discussing growth strategies around Greater Bay Area, how can we attract more patients from Mainland China, can we open patient acquisition centers in the south of China. Very, very good discussion. Maybe one comment while we're on this page around Turkish lira. There has been a massive depreciation, and maybe Evren can later help us comment a little bit on the situation in Europe at this stage. There is a translation effect that we will have to consider for Q4, which is likely going to depress our net income and our revenue performance slightly. I don't think it's going to be very material, but there is going to be a translation effect that we will have to consider. So look, our caution around looking forward remains. Of course, we are super happy that the resilience remains and the performance remains on a really strong level, but I always guide towards patience and being a little bit moderated around expectation. Last page on our fight against COVID and the services that we're providing in the pandemic. And look, we will convert this page into something that is a little bit more a segment report around our laboratory business. We have 9.6 million COVID-19-related tests rendered since 2020. This is a very strong business, very strong, growing. We have, in India, acquired the remaining stake in DDRC, which strengthened our lab business in India, SRL. We're strengthening our activities here in Singapore and in Malaysia with further investments to expand capacity. We have a great expansion in the Turkish business that expanded its laboratory test library further. So a great business, and we'll move towards a little bit stronger segment reporting around this great business. And with that, I'll give back to Kelvin.

Thanks, Joerg. So on Slide 11, I think there are 2 key messages I'd like to bring here. The first is that you can see overall a continued progressive recovery in inpatient admissions. And by that, I refer largely to the non-COVID-type admissions. But the second message really is if you look at the performance in the different countries of operations, it is one of agility, meaning to say that we have now reached a point in our operations that living with the virus is a new normal, and we are able to do so. We're able to flex our operations according to the situation. I'll just give some examples here. In Singapore, you can see here how actually, Singapore went into an endemic situation in Q3, which meant that there was a growth in COVID-19 cases. And we started taking many of those patients. At some point in time, we probably had 100, over to 200 inpatient admissions for COVID in our beds. And that's why it appears then to reduce the revenue intensity, but it doesn't matter. The point is that we were able to take those patients in, and we know they were passed, and then the non-COVID patients come back to fill the beds. And you can see that actually in India, where that's exactly happened going from Q2 to Q3. The inpatient admissions actually went up, and that's not COVID related. In fact, COVID patients dropped dramatically in Q3 for India. But conversely, the non-COVID patients bounced back. And once again, it's -- as a case in point, we were able to flex those operations very quickly and nimbly to adapt to that situation. In India, the revenue intensity goes down because actually, in Q2, there was -- from Q2 to Q3 because in Q2, there was just so many sick COVID patients in the beds that increased that revenue per admit. But as that went down in Q3, then that revenue intensity goes down. So the point here is that our operations are agile. We flex according to the situation as now we live with the virus. Going to some of the country's highlights. In Malaysia, on Slide 12, you can see revenue has improved 23% year-on-year. For the quarter, EBITDA grew 26%. Really, I think what featured in Malaysia in Q3 was -- there was still some heightened alertness and movement control-type situation. And that's why inpatient admissions appeared to decrease by 11% compared to the year before because in the same time the year before, there was actually less movement restrictions. But then as the movement restrictions got lifted at the end of Q3, we can see that admissions started to increase again. Intensity is high because during movement control-type situations, the sicker patients will come to the hospital. And going forward in Malaysia, we continue to track that recovery. We'll focus on our cluster strategy, continue our organic growth as well as look at inorganic opportunities. On Slide 13, I just wanted to give you a quick sense of that -- an example of the synergy initiatives that I've always been talking about for the group. I'm very proud that we are now implementing our homegrown IT system. It's called Cerebral Plus. We have developed this system for many years, almost 20 years, out of our Acibadem operations, fine-tuned it and put it under the latest technology platforms. We are now localizing, customizing that for use in different countries, starting in Malaysia. You can see here we have successfully implemented it now in several hospitals in Malaysia, and we will roll it out across entire Malaysia over the next couple of months. Now this is an example of synergy across the group where we bring our parenting advantage to bear, helping to reduce costs, but more importantly, and at the same time, deliver that superior patient care and operations at the same time. Now in Singapore on Slide 14. It continues to grow, year-on-year revenue 32% up. EBITDA is 5% up and occupancy was at 55%. So relatively not yet fully recovered on the non-COVID volumes really because foreign travel is still not back yet. But again, as a case in point, Singapore going into that endemic phase in Q3, our hospitals responded very ably and very quickly, took in that many more COVID patients. COVID patients, they are not so sick in the case of Singapore context, but again, able to flex operations very quickly. Now the EBITDA margins appear to be lower, but largely, this was due to a one-off gratuity and incentive payment, largely to frontline staff given the labor situation and to recognize the staff for what they've been doing. But it was a one-off in Q3, without which the EBITDA margins have probably been about the same as prior year. The next slide, just a flavor of how we continue to improve our services towards more patient-centered care, in this case, a breast center, which is a comprehensive one-stop integrated service for breast cancer in Mount Elizabeth Novena. On Slide 16, our Turkey and European operations continue their strong recovery. Revenue improved 19% to MYR 1.1 billion. EBITDA grew 34% to MYR 300 million. And inpatient admissions recovering, continue to grow strongly. In fact, bed occupancy is now at 75%. And this is while COVID patients are actually dropping. In other words, it's really the non-COVID business that's growing strongly, both domestic and foreign volumes. Next slide. You can see here how we continue our operational hedge for our Turkish operations. Non-lira revenue or the hard currency revenues are now 40% of entire Acibadem Group's revenue, which, of course, comprises of 2 parts. One is European operations, and two, foreign patients who are coming, and in fact, coming more and more so into Turkey. So within Turkey itself, the foreign patients made up about 20% of the revenues.

And I think maybe on that point, I think it's good to note that despite the currency challenges, the business has been growing very strongly year-over-year. So not only has domestic inflation and cost impact been compensated, but the business has been growing substantially during this period of time.

So Slide 18, this is a heartwarming story and also a clinical achievement, how our Acibadem Altunizade Hospital successfully completed a 27-hour separation surgery for conjoined twins, something not very easy to do. We're very proud of and very happy for the twins. Moving on to India on Slide 19. This is really a testimony again to the agility I've been talking about. We saw a phenomenal almost like cutover as you were from Q2 to Q3 when COVID-19 inpatient admissions dropped off. But conversely, that volume was almost entirely taken up by non-COVID volumes. And thereby, you can see the bed occupancy remaining about the same, 68%, 66% levels. So again, strong growth here. Revenue, 41% up; EBITDA, 100% up compared to the prior year. And intensity, too, slightly up compared to prior year. But I think on an intensity basis, we don't read too much into it because that's compounded by that change of mix between COVID and non-COVID. I'd say that for India operations now, the intensity has normalized largely because most of the volume now, it's almost normal-type volumes without COVID. So both sick patients, urgent patients, electives, smaller electives are largely back. In India, we continue to advance our operations. In Fortis, for example, where we have -- it was our large transformative acquisition, we rebuilt the brand, rebuilt that trust. And you can see here now many examples of how we're continuing to invest in advance care. Fortis is expanding its technologies. For example, we are now acquiring the latest state-of-the-art equipment such as MRI-LINAC, which enables very accurate as well as much quicker radiosurgery and other types of equipment being commissioned in our India hospitals. Gleneagles Hong Kong on Slide 21. It continues its upward trajectory. We're very happy that it's come of age, built its brand. Many doctors now coming to admit patients there. Our partnership with Hong Kong University is also strong. In fact, we recently expanded our Hong Kong U professorial clinic, which means that the Hong Kong University doctors are now bringing their private patients more and more to Gleneagles Hong Kong. So EBITDA breakeven ever since May '21 and continues the upward trajectory since. So with that, I conclude on Slide 24. I think overall, across this whole pandemic times, we've shown great resilience, strong recovery and quite clearly now transformed our operations in this new normal to be continuously agile and flexible to adapt to the changing environment. We continue to implement our strategies anchored on that foundation of trust, drive through operation synergies and operating excellence across the group. We are now well positioned as we move forward to accelerate our growth journey, COVID recovery, organic growth, filling up our beds as well as we look towards new growth platforms, inorganic acquisitions, digital transformation and expansion into an ecosystem as well as our global laboratory business. Thank you very much.

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

[Operator Instructions] And we've got our first question, comes from the line of Rachel Tan from DBS.

Congratulations on the strong results. Yes, it's very exciting to hear that there are some additional plans to your potential expansion. Just wondering if you could give a bit more detail on what kind of -- how are you looking to invest in the European countries? Are you looking to do it similarly, like how you have been doing slowly acquiring single hospitals? Or are you looking at big sort of acquisition of operators within the European countries?

Thanks, Rachel. Thanks for the question. So maybe I take a step back and talk about how we think about acquisitions. So first and foremost, of course, we make sure that we grow organically, there are beds to fill. We'll do that. Then we deploy capital efficiently to look for acquisitions via our cluster strategy, which I talked about. Really what that means is to add on assets in areas where we are really strong, we have the know-how to operate, and actually, the demand continues to grow. So that's what we do in all our markets. That's certainly true also for our Acibadem business, whether it is inside Turkey, for example, around Istanbul or other cities where we are clearly already operating strong. And also that European beachhead that we have started, the journey we started, I think, will continue as we keep having those proof points of being able to operate in those respective markets that we have fired up operations. Of course, we look towards consolidating and growing those assets.

Maybe we have -- I think we have Evren on the call. So maybe Evren, why don't you share with us a little bit about the European story?

Sure. Maybe just to add to what Dr. Loh said, I think we are very excited to expand in European -- our European business. And what we're planning from a strategic point of view, we're looking at 2 fronts. When you look at the Eastern Europe growth, we are looking to expand the existing platform, which we already established through our Acibadem City Clinic business. Serbia was a recent addition to that. And we are also looking at other opportunities in the region in terms of M&A or other organic to grow our existing country businesses. So that's one side on how we're looking at growth. But also not to mention our Western Europe strategy. As you know, we had a very successful entry into Western Europe via our day surgery hospital in Amsterdam. It's working quite well. And we are looking to increase our presence in that mature market and maybe replicate similar business in different target cities within Western Europe. So that's also another area that we're very keen to expand our business in that geography.

Thanks. Thanks, Evren. And look, for everybody who is not so familiar with our business in Western Europe, the Amsterdam clinic is a really fast-growing operation. And further expansion can only help us in increasing earnings but also in increasing this whole European ecosystem of acquiring patients and bringing them then into core hospitals in Acibadem.

Got it. Can I have a follow-up question on this? You talked about potential dividend payments from Acibadem. Are you looking to use the dividend payments for further expansion? Or are you looking that there could be a potential increase in dividend payments from the group company?

Look, I think the questions are a little bit unrelated. I feel on the one hand, we need to encourage all our participating enterprises to pay appropriate dividends. And I think we would really appreciate a strong dividend policy from all our subsidiaries. Then the question on how we finance acquisition and growth is probably a secondary question. Of course, if that -- the dividend payment coincides with a larger acquisition, you can discuss about how to finance the acquisition. But I would probably separate the 2 topics. One is the correct dividend policy and leverage capital allocation in the subsidiaries. The second one is how do we fund acquisitions.

Okay. My second question is in cost. As we have seen across the board, there has been chatter about the increase in staff costs. How much of this increase in staff costs do you expect moving forward coming into 2022? And do you expect that to erode some of your margins? Or is there a room for you to cut costs in other areas?

Thanks. Thanks, Rachel. So first off, I think to be clear, in Q3, there was a significant effect with regards a one-off incentive to the tune of probably MYR 70 million to MYR 90 million sort of one-off. And that's what you're seeing the effect coming out of Singapore. Now going forward, of course, there are some pressures as we have guided towards. They are largely likely to be inflationary in nature. It's not going to be huge, lumpy ones. In terms -- so that inflationary pressures or health care labor cost inflationary pressures will be there in the respective markets according to the inflation rates of those markets. What are we doing about that? Of course, we are deploying measures to improve that productivity. I would dare say that we have that superior ability to do so, firstly, in terms of share -- improvement of operating processes and also new innovative ways of changing the processes of staff such that they can do things better, smarter. Digitization is one way. The other move that we are making is in Singapore, for example, we are getting our nurses to operate at the top of the license, which really means that we cannot -- the nonessential or the lower or the less sophisticated work to staff ranks who are actually then below that nursing job grade, which improves the nursing productivity and also reduces costs. So we continue to do that. I don't expect it to create a huge, lumpy spike. But I think the watch out that we have been guiding to is that coming off -- assuming that COVID-type revenues come off, I think it's fair to say that when business as usual comes back more and more, then that's work, right, that we have to do in hospitals and require staff, which is quite different from putting up many more millions of PCR tests, which doesn't require much incremental stuff. So that's a sort of normalization that we have to think about.

Let's also, in this context, recognize the frontline workers. There is a very clear tiredness of people and nurses in the frontline who work in hospitals to deal with patients, to deal with this crisis. In Europe, you have discussions about, yes, service staff, health care staff going into other industries because they feel it's too much pressure. And I think there needs to be an appreciation for frontline workers. And that, of course, needs to also go into recognition around compensation levels. And I think we, as one of the prime players here, need to do the right thing, to really recognize people and keep talents in our system.

Got it. But [ is it ] inflationary costs of parent in certain countries like, say, Singapore? Or is it quite similar across the board?

There is inflationary pressures in every market that we operate in. I think the general benchmark that you can take is typical labor cost inflation, right? Different markets have different numbers for that. In India, it could be order of magnitude 5%, 6%; Singapore, maybe 3%, 4%. In Turkey, you can imagine how things are. Those numbers are probably there. But of course, we continue to drive that productivity. And to be fair then, overall pricing, too, has to reflect the inflationary change, right?

And your next question comes from the line of Amanda Foo from Credit Suisse.

Congratulations on a good set of results. My first question is regarding North Asia. It's good to see that your EBITDA loss is narrowing, so I just wanted to find out. Is this mainly because of Gleneagles Hong Kong? Or is China also improving?

Thanks very much, Amanda. So indeed, Hong Kong is improving. EBITDA continues its positive trajectory. For China, it's a relatively small operations. We're firing up some new hospitals. We're keeping those costs -- start-up costs low. Cleaning operations there, of course, continue to be running operationally well. But yes, the sum of all those things that -- making sure that we control our start-up costs in Mainland China strongly and then the ramp-up of Gleneagles Hong Kong, the sum of those things, it creates an effect that you see.

Okay. That's clear. And if I could add a little bit for the region. Could you comment a little bit on the recent news that IHH is looking to dispose of its China assets? And what's the potential return of -- ROE expansion that we can expect should China be out of the picture? Any color will do.

Thanks for that. I think as we have said, we do -- I've talked about our cluster strategy. I've talked about being capital efficient, which requires us to do a portfolio review time to time. So there could be some strategic discussions that are going on. But for China, I categorically say that there is nothing that we can announce at this time. Way premature. Some nuggets that Joerg was talking about earlier with regards potential announcements, that may have to do more with some of our smaller operations in India than it has to do with China.

Let me quickly come back to the China topic. Look, first of all, I think we are really happy that our assets and our activities in China are being recognized with the value they have and with their growth potential. I think that's a really great recognition. We agree with that, that the team is doing an amazing job in ramping up operations, turning around, pivoting to a new reality in China with lesser expert-focused business and a much more middle, upper middle income patient population. So I think there's a lot of potential there. But as we've said before, it will take a lot longer to really breakeven in China, and we need to adjust and review our strategic positioning, and that's what we're doing. We're working very hard on this. And look, we're not commenting on any rumors, obviously, but it's great that there are people out there who recognize our business.

To give an example of some strategic review, our strategic rethinking. I think Parkway Shanghai Hospital is a good example of that. Firstly, glad that construction is very much back on track. We expect opening to be -- construction to complete pretty soon, in the next few months, and operations to start roughly around middle or Q3 of 2022. But the strategic rethinking is with regards the model of care, right, the way -- our partnership with doctors. It looks like we should look for more partnerships. We are thinking about which specific specialties which are likely to have higher, faster ramp-up as compared to, say, doing 20 different type of specialties, which could be typical of a general hospital and some of our other operations. So just an example of pivot and rethinking that we have been talking about.

Appreciate the color given there. And my second question will then be regarding Acibadem. It's definitely good to see Acibadem contributing really well to the group, but it does seem like Q-on-Q occupancy rate has dipped slightly. Is this something that we should be concerned about? Or is it just because it's a seasonally weaker quarter? Appreciate some color on that.

Thanks for that. The quick answer is no. I would not be concerned at all. In fact, we see strength going from strength to strength. There might have been slightly less COVID admissions as we went from Q2 to Q3, but I'm definitely not concerned about that apparent headline number. Evren, do you want to give more color?

Yes. Kelvin, definitely, you're on point. The reason why for the lower occupancy is fully stemming from lower COVID admissions. If you look at the comparison of COVID contribution to our revenues, it was only much lower amount compared to last year's third quarter 2020, where we -- where all the restrictions were lifted by July, and we had more patients in our hospitals with regards to the COVID. But then that somewhat tapered off in 2021, but then our non-COVID business came back quite strongly.

And so 75% probably would be a fair assumption going forward? That's quite a normalized number by that?

Yes. In fact, I would say 75% is already running pretty tight. You can appreciate that 75% as being an average does mean that on a weekday basis, you're then doing 90%. And then if you divide that by many different hospitals, it means that some hospitals are running 100%. The reality is that we are looking for that, looking for ways to expand. We have Atasehir, the newest hospital that's coming online by next year, and we expect that to fill up for the reason that we talked about because of this demand pressures.

One last question if I can just squeeze on Acibadem. I understand you mentioned that you don't expect the transformational impact to be material. But could you maybe give us a little bit more guidance as to what -- for every 10% depreciation in the lira, what could potentially be the translation impact to the group?

I mean you see the relevance of Turkey to our bottom line, the net income. I wouldn't want to oversimplify it by giving a mathematical calculation. But I think if you look at a drop in the lira, as we've seen it in the last couple of weeks, I think you can assume that it has an impact on our Q4 financials by maybe 4%, 5%, plus/minus, on the net income of the group. So I think it's not really super material. If you annualize it, it's certainly in the 1, 2 percentage range. So it's not really that difficult. Of course, if you have a 30% drop, you would then have a little bit of a larger effect. But again, let's focus more on the cash exposure. We are completely hedged with the exception of 1 or 2 lease contracts that are a bit more complicated to deal with. We have a strong natural hedge with some European income. 40% of the income in Europe is in foreign currency, plus our loan exposure. Debt exposure is hedged through cross-currency swaps, which are all super in the money should we choose to unwind them, which we're, of course, not doing. So I think we are in a good position. Translation effect is not very material. But if you look at what happened in the last couple of weeks, maybe you have, I don't know, 5%, 6% effect. It's not as simple as just applying some math.

And your next question comes from the line of Shyam Srinivasan from Goldman Sachs.

Just the first question is on Malaysia. We have now seen about 3 quarters -- 2 to 3 quarters where occupancies have remained subdued. You talked about movement control. But is there something that -- as we come out of the pandemic, are we, by any chance, losing share in terms to other hospitals? Just trying to understand. Occupancies have remained low. And is it just a macro thing? Or is there something micro that's impacting our occupancies in Malaysia?

thanks, Shyam. So the answer is it's a macro thing. In Malaysia, the private hospitals are quite used to, in the pre-COVID-type situation, taking a very wide range of cases, those which are relatively not so sick. For example, pediatric patients are coming in for diarrhea, high fever, various types of viral illnesses. And also, especially in our type, in our brand, our hospitals, the very acutely sick, big surgeries, cancer patients and so on, that's in our type of hospitals. Now in the pandemic-type situation, in Malaysia, that effect is greater seen in the sense that because of that relatively big proportion, that macro effect, as you call it, of this smaller elective or less sick patients, that tends to get held back, right, or they go away. The pediatric is such a great example that if everybody is wearing mask to mitigate COVID-19, then actually, much of the other pediatric viral illnesses are down, too. So it's certainly not an effect of our operations of our brand, but that's just a market-type situation. Now what we then do see is as the movement controls get lifted, the volumes do start to come up. We have seen that every time movement controls get lifted, it starts to come up. Unfortunately, over the last 2 years, 1 to 2 years now, in Malaysia, there's been a fairly persistent overhang of that movement control that's starting to get lifted. And actually, as we speak right now, we certainly see that upward effect that I talked about. And hopefully, no more reinstatement of movement controls. But again, there's that evolving situation with COVID-19 as you know in the rest of the world.

Got it. Alluding to your comments in the opening remarks around as things are opening up, we have started seeing improvement in Malaysia. So can you tell us what is, say, November occupancy? Is it higher than 48%? Or how should we look at that?

Higher than 48%.

Second question is about medical tourism. If you can help us understand. I think Acibadem, you've broken it out. I know Fortis is 3%, 4%. For Singapore and Malaysia, how should we look at medical tourism? What's your outlook for next year? I know there is a backdrop of the new variant. But how should we look at medical tourism? What are we doing as a group to ensure that when things open up, that we'll get back our market share on international patients?

The quick answer is I'm really confident that we will get back our market for medical tourism in all the -- in all our areas of operations. Every time border restrictions are lifted, we see that. How do I know that? The underlying demand is there. We have kept in touch with our existing patients. We have that network of offices in the different countries. We now have digital connectivity that we keep in touch with these patients. The proof points are already seen in Turkey when the border restrictions are lifted. Medical tourism rebounded strongly. In Singapore now where there are now vaccine travel lanes with Indonesia, we have seen hundreds of bookings starting to line up. And assuming this vaccine travel lane arrangements and further lifting of border restrictions happens, then we expect that rebound in the medical tourism.

Last data point, Prince Court, what is the contribution in Malaysia this quarter?

Sorry, can you repeat that question?

So Prince Court, Prince Court Medical.

Are you saying Prince Court Medical Centre?

Yes. What's the contribution for Malaysia?

What's the contribution for the foreign patients, is it?

No, no, no. I'm asking Prince Court used to be 12% of Malaysian revenue. So what is it for Q...

What's the contribution of...

It's probably still about the same.

And your next question comes from the line of Nicole Goh from UBS.

Just wanted to follow up on the Prince Court question. So you mentioned that it's about 12% of Malaysian revenue. What is it like on an EBITDA contribution-wise?

Look, Prince Court is a large premium services hospital. It has, on average, a similar EBITDA performance as other hospitals that we have, potentially with some improvement that we see after the acquisition. There's already a lot that has been done in terms of improving operations, getting EBITDA levels up. So I think there's a little bit more room to grow in Prince Court and improve the business. So on average, EBITDA margins are slightly below where we would usually see a similar hospital that we've operated for a longer period of time. So there's a little bit of runway to improve.

I'd also say that amongst our hospitals in Klang Valley, Prince Court clearly is set up for quaternary, tertiary-type services, well equipped. There's a lot of complex care. Typically, you used to see a higher percentage of foreign patients, which obviously is relatively muted in the current times. And therefore, of course, we have to maintain that infrastructure. We grow -- we are working on growing the domestic patients, taking COVID patients at this time. But again, as pointed out, once travel gets -- once the borders open up, then we expect that to come back as well.

Sure. So to be fair, that would be 12% to top line and maybe a little less to EBITDA given what you have just mentioned.

Yes.

Okay. And then I just wanted to just touch a bit about the budget, the proposed changes in the budget 2022 for Malaysia. So I think one of them is the prosperity tax. What is the impact to you? And secondly is on the foreign income, foreign-sourced income. Now the tax exemption is being lifted. Given that you generate a lot of your revenue and earnings from outside of Malaysia, how would that impact your numbers?

Look, very, very good question. First of all, I'm always of the view it's great if you're in a position to pay a lot of taxes because it means you are very profitable. So that's actually a good problem to have. Of course, we're not happy that in some countries, tax rates are increasing. It's a bit counterintuitive. In many countries, enterprises are encouraged by tax incentives. So that's a little bit of a countermovement here. The impact on us is not outrageously large. I think what I see here just now, I think there's a MYR 20 million impact on our 2022 budget or something. So it's not really substantial. Now with regards to your second question, of course, we are looking at ways how to optimize our position still in 2021 and make use of beneficial treatments that we still have today. And then going forward, of course, well, then that has the respective impact of a little bit of a higher tax exposure. So I think overall, yes, there's an impact. If I look at the MYR 20 million budgeted at the moment, it doesn't appear to be too onerous. But of course, we appreciate governments to stimulate businesses with lower taxes.

So you're saying that MYR 20 million is probably the impact from the prosperity tax. But when it comes to the foreign-sourced income lifting of the exemption, that's something that you're trying to still see how to maximize it this year -- or minimize the impact rather.

Yes.

Okay. But do you actually -- I mean in the past, you actually repatriate a lot of the funds back to Malaysia. Because I think it only applies to funds that actually get repatriated back to the country.

Right. And that's exactly the question, how does it combine back to our in-house bank that we are building up our global treasury center, which is going to reside in Singapore for obvious reasons. So we try to optimize around that and make sure we have as little impact as possible. But you can't avoid everything. Dividends are paid to shareholders also through our Malaysian holdco structure. So I think we can't avoid all of it. But we are trying to optimize around where and how do we allocate funds and have funds flows.

And your next question comes from the line of Divya Gangahar from Morgan Stanley.

My first question is just on Singapore. If you could give us some quarter-to-date trends in Singapore as cases have come off here and people are switching more to ART testing rather than PCR. You also mentioned the Indonesian detail seems to be coming in. So what's the current status of foreign medical contribution, especially in the fourth quarter as things have opened up? And do you see that normalizing? And how should we think of the revenues in the fourth quarter for Singapore, especially with COVID tapering off? That's my first question.

Thanks, Divya. So Singapore is in somewhat of a crossroads. At this point in time, what we do see is that we are going into a living with the virus or endemic state. There's much less concern, much less fear. Movement restrictions are being progressively lifted. So the domestic volume clearly is continuing to grow. We are also excited. I'm looking forward to the return of foreign patients because the -- what is called a vaccine travel lane, it simply means that vaccinated people tested negative can come across to and fro Indonesia and Singapore without quarantine. So the book order is strong as I mentioned earlier. But that vaccine travel lane literally started yesterday. So we'll await those patients coming in. But to answer your question, sure, we expect many more in Q4 than we have ever seen probably in the last couple of quarters now.

I mean do you think that offsets -- yes. I was just trying to get a sense that you think that offsets the tapering that you expect from the COVID related...

I think that's very hard to predict, hard to predict how fast that goes off. My sense is that the COVID-related services in Singapore is not going to drop off in a big hurry, especially given now, again, an increased caution because of the new Omicron strain. But it's difficult to make such predictions. But I can say that there's still a lot of COVID support services still ongoing for the obvious reasons that I just mentioned. There will be a time that, that comes, when that drop-off comes. Maybe not so soon, but there will be a time. Hopefully, actually, because we do want to move into a fully normalized situation.

But I guess I'd like to come back to what we said in the prior quarter. There is this emerging disease management. And we have services built in many countries to help governments, to help the communities we work in, in managing this exposure. And I think what we're learning right now is that these businesses are ongoing businesses. Is it COVID-19? Is it some other variant? Is it something else entirely? I think it is a business stream, a revenue stream that we have developed, where we are strong based on the core business we have. And we'll expand wherever we can and breathe with the system to take advantage of that. So in that sense, we are already now a multi-income stream enterprise.

Right. All right. My second question is on the portfolio rationalization. Just wanted to understand, would you actually consider exiting China? Or is this more of a strategic review in terms of which is the better way to do build partnerships with super specialties or even something like an exit is something that you could consider from China? And also wanted to understand if Hong Kong is included in these overall comments when you talk about China or not.

Let's take things piece by piece. We've come through an amazing recovery or a recovery of growth in Hong Kong, and we're really happy about it. Very happy to discuss net income breakeven scenarios for 2023 that we see as being very, very realistic. And then let's look at the China market. They are very specific about the China market. We like the market. It's a high-growth area, a lot of investment going in, a lot of demand in the areas. But it is China, and one has to operate there in line with local requirements. So we are looking at the strategies that we need to adopt. Does it always mean one has to be in control to participate in the market? Well, something to think about. And I think it would be wrong to say we want to exit China or anything. China is an important a part of our portfolio. There is growth in this market. Now the ways of working, the ways of operating and partnering, let's give us a little bit more time to discuss this. What we do know is there are companies that have great success, focused around certain specialties, lifestyle, infants, deliveries, young families and other things. And there are also more intensive things in cardiology and oncology that are very attractive fields where there are is a market for private hospitals. Give us some time to restrategize around those, find the right way to be successful. We are determined to make this successful, but we have to be realistic that it may take different approaches.

And just a housekeeping question to end up. On the staff cost, even though you mentioned that you expect some inflation over the next few quarters, but if I look at like the recent trends, I mean, staff cost on a 2-year CAGR basis is anyway up 10%. So we have actually already seen staff costs increasing consistently. I mean is the comment more to say that, that pace of acceleration will increase? Or is it just a more guided statement of what you said that business as usual comes back, so there would be a coordinated increase in terms of as a percentage of revenues but not necessarily over and above?

It's more the latter. So meaning to say that -- so firstly, what you observed with regards to historical trend, it's not just there is an inflation. I already talked about that. But our operations are growing too, right? We made acquisitions, added hospitals, expanded operations. So the numbers of staff actually grew as well. And moving forward, I think it's the latter. We're moving -- we will move towards more business as usual, do a lesser proportion -- do a higher proportion of our hospital base -- we'll fill up those hospitals. And of course, we then have to increase the staff numbers. So with regards labor, wage inflation, I think that's par for the course. It wouldn't be anything extraordinary, and we continue to mitigate that by driving productivity, advancing our processes and digitalize.

And just the last thing. Interest expense in this quarter was quite low. So the implied cost of debt seems to be very low. Anything one-off in this that we should be aware of? Or just explaining why the interest expense has been so low in the third quarter.

We are continuously paying down debt with idle cash. I'm not aware that there's any particular one-off in Q3. Well, let's get back on that to you.

And your next question comes from the line of Stephanie Cheah from CLSA.

Most of my questions have been answered, but just quickly on your -- I think during your past briefing, you mentioned that -- to be careful to annualize sort of the numbers. And I know you can't give any forward guidance, but seeing that -- where we are right now in the 9 months, are you still conservative in assuming -- yes, in assuming that you can hit the MYR 4 billion EBITDA numbers that you were mentioning before? Or do you -- what trend do you foresee for this to not happen, so to speak?

I mean you've seen how Q3 is already a bit softer than Q2. So I guess it was prudent to guide to a little bit of softness. We do learn every day, every week that the market is unpredictable. There was no expectation that the Turkish lira would drop off the way it did. There was no expectation that a fourth variant is coming out as it did. If I look here in Singapore, the discussions people have with the government, yes, just over the weekend, we had discussions around a new checkpoint that is coming in, in order to facilitate Malaysian visitors or workers to come into the country which, of course, we are working on and trying to help the community in this, and it does lead to further income. So I think overall, my caution is that we should look at a much more normalized business for IHH and consider the bumps and the positives that we have as the icing on the cake. We will capture those where we can. But there is an underlying business that is the way it is. We have seen those compensation increases. There is going to be competition around lab tests. Pricing will come off because there's more competition. So I think if you ask me, very near term for the year, well, look, this is going to be a good year. I think after 9 months, it's hard to deny that it will be a good year. I'm just trying to be a little bit cautious around being too overoptimistic that we suddenly end up with, I don't know, a 26%, 27%, 28% EBITDA margin ongoing and then perpetuate that and put it into models for 2027. I think that's unlikely to happen. I think we are a solid business around 24, 25 in favorable quarters, 26% EBITDA. That is a great number. I think we are solid in that space. Return on equity is going to remain well above 5%, 6%. It's hard to see how that would change. So look, take some of the caution in account that -- for my German prudence around forecasts. I'm happy with the numbers we have. I think we're going to end the year reasonably well with smiling faces. Then look at the core business we have. There are challenges ahead. We do need to manage pricing pressure around lab tests. We do need to manage crisis situations around currencies around the world. There's still a Supreme Court topic we have to get resolved. We're very confident it will get resolved. Also that is delayed now. So look, let's just be realistic and have a happy undertone in what we do, but let's stay overall realistic on how the business is going. I don't know if that gives you more clarity, but that's a bit of the flavor I want to share.

And we have time for one more question from the call, and that comes from the line of Isaac Chow from Affin Hwang.

I just have more questions on the key operations. We know that the lira has depreciated a lot, and based on your historical trend, I have seen that the average revenue intensity tends to go up. But this time around, the depreciation is very steep. Do you think that at what point -- at what price we at IHH -- at Acibadem we have difficulty to raise the price in tandem with the currency movement? And at what price would that start to affect the demand from the local market?

Evren, if you're on the line still, maybe a comment on that?

Sure. Thanks, Kelvin. I think that's a very good question. And I also heard Amanda's question overall. So I just wanted to maybe give you an overall view on how we look at Acibadem operations and all the challenges that we're having in the country. If you look at the depreciation in the past few weeks related to macroeconomic situation -- but I would like to point out the fact that Turkey is a very dynamic country with robust characteristics, young population, low public debt, very good capital efficiency. So then when you take that to Acibadem, we have crisis-free operations given our very strong clientele. We serve to the A+ segment of the population in Turkey. Our volumes are improving, and also not to mention, fourth quarter is going really well so far, above our expectation. So now coming back to your question on price increases and how it is going to impact in Turkey, our prices are indexed to inflation. So because now we are high inflation as a country, when the prices are set, which half of our prices are coming from private insurance companies will be based on a benchmark, which inflation -- the CPI itself is the basis. So we will be able to pass on the inflation cost to our patients in any case. So we don't have any issues or concerns with regards to whether we can increase our prices in line with the inflation increase. So that's one part. But given all that, we are very cognizant of the fact that [ we turn the ] devaluation. And we're also working very hard at the company to diversify our revenue base. And these are coming in 2 fronts. One, we're trying to increase our on-lira revenues via medical tourism. I think Dr. Loh, Joerg have elaborated to that. And I kind of mentioned about our -- driving our growth in our European business. So in 2 folds, we're trying to make sure our revenue base is quite diversified in addition to our, like I said, crisis-free operations. And then -- and maybe my last remarks on the overall Turkish business. I mean we are extremely prudent given our perfect balance sheet position after all these years but also looking for future growth. And lastly, quite excited for dividends, as Joerg mentioned earlier, and then we expect that to be sustainable in future years. So that's how I look at it from an overall perspective. I don't have any issues or concerns whether this macroeconomic situation will impact our revenue per patient or how we can pass through this macroeconomic effects to our patient base.

All right. Can I just -- quickly, one more question for you. Just now -- on the tax, just now you mentioned that there's probably about 20 million of impact to 2022 budget. Can I just clarify whether this is based on prosperity tax itself? Or this also take into consideration some form of impact from the foreign-sourced income?

That's the prosperity tax-driven income -- driven effect.

I believe we have some questions from the webcast, so I'll take them now. I believe many of the questions regarding the prosperity tax as well as the foreign-sourced income, I think that has been addressed by Joerg and Dr. Loh already. So I'll just take off some of the questions that have not been asked. So one of it is from Alan asking about how is Gleneagles Hong Kong doing in 4Q 2021 in terms of occupancy rate. And is it improving Q-on-Q?

Gleneagles Hong Kong, so it's continuing to grow. EBITDA remains positive, getting upward momentum. The inpatient admissions are also continuing to grow. We are definitely -- that's definitely on the back of the strong domestic demand. We're also looking forward to the borders reopening between Mainland China and Hong Kong. We are starting to gear up for the patients coming across the border from China.

I think if the question is specifically on bed occupancy rates in Hong Kong quarter-over-quarter, we are improving sequentially. Of course, after a huge climb in the first half year, I think there's a bit of a slowing down. The team needs to recapture, but we are improving quarter-over-quarter.

Another question from [ Hwang Wen ]. Is there a difference in profitability in COVID-19 testing services in different countries?

Yes, there is. So the different countries really have different regulations, different dynamics, and so the answer is yes. And some countries have more stringent price caps. In some countries, the consumables are supplied by the government, and we then don't charge for consumables. In some other places, you get to charge for the consumables. So it varies quite a lot. Overall, our COVID services are positive to our EBITDA. In fact, on the corollary, as Joerg has been guiding to, it's pushed up our margins in a way that is beyond that business as usual.

In India, why was earnings intensity lower Q-on-Q despite having more non-COVID-19 patients in third quarter versus COVID patients?

Yes. That's an excellent question, and I'll try to explain that. So firstly, when we look at this -- maybe the slide that is being looked at is the earlier slide, right? And that shows -- the earlier one shows the revenue intensity in terms of revenue per admit dropping, this slide, right? So from Q2 to Q3, what happened in India was that Q2 was -- there was this huge spike of COVID cases. Anyone -- I think at a height of it in April, there's probably something like 50% of the beds occupied by COVID. And in India, when COVID cases land up in hospital, it's the very sick cases, right, simply because of the sheer shortage of beds during that very acute time, the crisis of time. Any patient that's literally not so sick or less oxygen requiring would not even get a bed in a hospital. So what that means is that these are the type of patients that tend to stay long in hospital and therefore have a higher revenue per admit. Now when you go towards a normalization in Q3, that COVID volume drops off significantly, that normal-type patients normally like this come back with not as long stay because -- as those kind of very sick COVID patients. Then the revenue per admit drops, and that's the effect that you see in India. Does that answer the question?

Yes. Thank you, Dr. Loh. Maybe we can quickly move on to the next question from [ Nami ]. Acibadem is PAT positive this year-to-date. However, it has been loss-making at bottom line level in 2018 and even 2019, excluding 2020 because of the COVID low base impact. My question is, without COVID-19-related services, can Acibadem be PAT positive in 2021 or year-to-date 9 months.

Answer is very, very obvious. Yes, absolutely. The European business and the foreign currency business that we have is already 40%. That is absolutely a net income positive. Plus, if you look at the ramp-up in the hospitals and the bed occupancy rates that we see in Turkey and the ability of the team, as Evren so well described, the ability of the team to adjust pricing to inflation, we believe the underlying structure of this business is clearly net income positive and will be a continued contributor to our bottom line.

A quick reminder that in 2017, 2018 and then lesser so 2019 times, there was that overhang of the ForEx debt, which was still substantial, which is now completely solved for.

Since we're still on the topic of Turkey. From Kar Mei from CIMB. Do you think foreign patients in Turkey, Europe will decline as international borders open further? And may I know, where do these foreign patients come from?

The answer is no. We do not expect the foreign patients to Turkey to decline. In fact, as borders open, we expect more patients -- foreign patients to go to Turkey. I guess the question is that is it because of effect of, okay, other countries, which does medical tourism are locked out, and therefore, there's that funneling of patients in Turkey, and if those countries open up, then we get lesser. No, I do not believe that will be true. I think the converse is true. As more opening happens, we're actually going to get more foreign patients because of a very strong reputation, clinical excellence and a strong service that Acibadem Group provides.

And also still from Kar Mei and Wee Kuang from CIMB, moving on to Singapore. Can you give us some color on how is Novena, Singapore performing?

It's performing very well. Mount Elizabeth Novena, I suppose it was a double-edged sort. We tried to develop that brand as Mount Elizabeth over the years. And in part, there was thinking perhaps that it would achieve the same kind of foreign patients as Mount Elizabeth Orchard had for many years. But the reality is that Mount Elizabeth Novena grew largely as -- it grew very strongly and grew largely with domestic patients. The foreign patient revenue is a relatively small contribution. And that trajectory has continued very strongly through COVID times. As we speak now, the Mount Elizabeth Novena's occupancy revenues, it's really probably higher than pre-COVID, just a very strong trajectory because of the nature of the hospital, and in its continued ramp-up fashion, COVID has not that much affected Mount Elizabeth Novena actually.

In Singapore, within the COVID-19 contribution, has PCR test contribution fallen off in 4Q drastically? And are they more than offset by the other COVID-19-related services?

So too early to give such guidance. You can see that for Singapore in Q3, COVID-related services overall actually went up compared to Q2. Q4 over Q3, I think it's early to say. Too many different dynamics. It is true that some PCR might get converted to ART-type tests. But on the other hand, we also now have many more ART tests because of vaccine travel lanes open up. And as we open up new lanes as well, actually, there are more -- that's been itself a driver of more PCR tests.

Thank you, Dr. Loh. Another question from Shafiq. Has the Bel Medic Group acquisition completed? And how significant is the contribution from this asset?

So it's been completed. In terms of contribution, maybe...

It's a small asset. I think it has less than 100 beds. So we shouldn't look at this one asset as now being a large earnings contributor. It is positive. So it is earnings accretive, but it's a small business. I think the point here around Bel Medic is much more the strategic positioning around this, the expansion of our network, continue in these markets in premium health care and build on the strength of Acibadem's international network to acquire patients for hospitals in Turkey but also then provide local excellent services in Serbia.

Maybe the last question that we have from [ Raman ] on the webcast. Can you share an estimate of how much the C+ system has saved for Malaysia and Turkey's OpEx?

It's a multiyear journey. Over a 5-year period, I guess we'll be looking in the order of magnitude of millions simply because we start to then shift out our third-party -- paying third-party for CapEx, OpEx, payment costs and starts to in-house that. Again, it's one of those things that in all likelihood not going to see a dramatic -- by itself, not going to make a dramatic contribution in our entire P&L. But it's the sum of all these things, right, that over time, keeps improving our operating capabilities, operating costs and hedges us against increased cost from external parties' IT software being one of these huge -- relatively huge cost that we incur.

And look at it that way. We are in an amazing position that we have an in-house service provider that is a best-in-class IT health care software solutions enterprise. That's an in-house business. And so we are in the great situation that while these are CapEx, of course, for our operations in Singapore and in Malaysia and other markets where we implement this, on the whole, we're actually supporting our own in-house operations, expand our digitalization strategy and the capability center of competence that we have built here in our Turkish network.

Thank you, Dr. Loh. Thank you, Joerg. I think we have taken a lot more time. Thank you for being so patient with us. And so now we'll now conclude the IHH Healthcare Third Quarter and 9 Months 2021 Financial Results Briefing. Thank you for joining us today. And if you have any questions, please feel free to contact IR via e-mail at [email protected]. At the same time, we do have a telegram channel chat. So we'll be happy to share the contacts with you and be able to regularly be updated with IHH-related news. With that, we'll conclude the call. Thank you, operator. Thank you.

Thank you.

Thank you. Bye, everybody.

Thank you so much. And that does conclude our conference for today. Thank you for participating. You may all now disconnect.