IHH Healthcare Berhad (IHH) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to the First Quarter 2020 Financial Results of IHH Healthcare's Analyst Briefing Conference Call. [Operator Instructions] I advise you that this conference is being recorded today, 27th May 2022. I'd 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.

Good afternoon, and thank you for joining us. I'm Penelope Koh from IHH Investor Relations. Welcome to joining us for our first quarter results briefing, whereby we are actually doing it via live video broadcast, which is available on our webcast. So with me today are Dr. Kelvin Loh, our Managing Director and CEO. I have Mr. Joerg Ayrle, our Group CFO, and I'm happy to have Mr. Ashok Pandit, our Group Chief Strategy and Business Development Officer to actually join us to share more about our laboratory highlights. Of course, we are also happy to have Mr. Evren, Deputy CEO of Acibadem, with us. The results materials are available for download on the IHH website. As for the sequence of event, Dr. Loh will first touch on the key performance and operational highlights for the first quarter. We'll have Joerg share more on our financial performance. Ashok will be introducing our laboratory business segment before finally handing back to Dr. Loh to wrap up the session. And thereafter, we'll move on to our Q&A. So with that, I'll turn the call over to Dr. Loh. Dr. Loh, please.

Very good afternoon, everyone, and thank you so much for joining us today for our Q1 2022 results briefing. Let me start on the next 2 slides, you can see some of the megatrends that are affecting health care. First and foremost, the demand for private health care continues to be strong. That trajectory certainly hasn't changed despite the COVID pandemic. There are also other trends which are largely around how the patient is also becoming more of a health care consumer. He desires better empowerment. There's greater emphasis on preventive care, there's greater desire to know more about one's health and therefore, assimilate the information through digital means to connect more conveniently to health care providers. These are trends that we embrace fully as we continue our transformation journey into becoming the world's most trusted health care services network. Now on Slide 6 here, you can see the headlines around our results. We've delivered good growth from our core operations, some of the contributions in Q1 '22, of course, continue from COVID-19 services that we have rendered. Revenue increased 6% year-on-year as the group saw growth in its key markets, a rebound in local patient revenues, some contribution still from COVID-19 services. I think, as you know, Q1 2022 was still a significant wave of COVID, particularly because of Omicron in the early -- especially in the first 2 months of that quarter. EBITDA grew 4%, driven by higher revenue. Net income -- net operating income increased to MYR 493 million and MYR 407 million, respectively. And we continue to progress on the 5 growth peaks that I talked about from the last quarter, particularly, we are -- today, we want to spend some time to talk about the development of our Global Laboratories business as a core business for our group. Now if you turn with me to Slide 7, you will see the performance here for IHH since 2020. You can see here the dip in Q2 '20, that, of course, was the start of the pandemic. But clearly, we have seen a sustained recovery and growth as we move towards the right-hand side of this chart. 2 years on, we have weathered the pandemic well. We have been nimble. You can see our year-on-year revenues grow to MYR 4.1 billion. EBITDA grew to MYR 997 million, and net income grew 12% to MYR 493 million. On Slide 8, you can see how the COVID-19 is still a part of our business from Q4 to Q1. It's been a relatively short time. But actually, during these 2 quarters, there were 2 waves of COVID. Q4, there was delta Q1 '22 there was Omicron. But this will change. As we speak, we are entering a phase of normalization, I am cautiously optimistic that the coronavirus has reached the end of its degrees of freedom to mutate in such a way that will cause more harm. It appears that new mutants are mild. There's significant health immunity in most of the markets that we serve. And that COVID-19 services, as you can see here, is likely to taper down significantly as we enter into Q2. So next, I'll hand over to Joerg to go through our financial highlights.

Great. Thanks, Kelvin. As you can see from the quick glance that Kelvin had presented, this was a relatively good quarter. I think much better than we had expected. We see revenues increase 6% year-over-year. We're now at MYR 4.2 billion for the quarter, continues -- we continue to see stable growth across all or most of our segments. We do see softness in China. So the Chinese situation, due to the lockdown in Shanghai is, of course, not improving. That's a sore point. Certainly, all other regions are growing very, very strongly. With one exception around Turkey. Turkey is growing in local currency very well. However, due to the translation effect and the onset of a hyperinflation situation, we see translation effects that affect us somewhat slightly negatively in the top line. However, on the bottom line, we still are strongly above last year also in Turkey, in Malaysian ringgit terms. Net income, we are 31% above last year. We are MYR 493 million. Our net operating income increased 21% year-over-year to MYR 407 million. So there's a little bit of a difference. We have a deferred tax asset that we've booked in Turkey that gave us a headroom in reported results. Return on equity is super happy continues to increase. If you recall a year ago, Q1 was still a bit softer in terms of return on equity. This number is an LTM number. So now with that Q1 '21 out of the way, we are on an 8-plus level. This still has some COVID favorability included. So we need to see how this develops. But I think overall, we should be quite happy inching closer to where we believe we should be. Strong cash balance for the company, good cash management, a bit affected by seasonal events with payables that were -- okay. That will move. There's some slide movement here. With payables that came in, in Q1 that we deferred from Q4, so a little bit lower cash conversion rate, 0.7%, roundabout should be a bit better going forward. We're actually quite happy, MYR 4.9 billion cash position. Please be reminded, MYR 2 billion of this is cash that we've deposited in an escrow account to support the takeover in India, the MGO in India. So idle cash or free cash that we have on hand to support all the growth initiatives is already MYR 2.9 billion. The next page, you see the sequential development. And I think the first thing you'll note is, we see seasonality coming back. This is a first sign that we are really coming into a new normal post-pandemic normal. We are -- you see this also with a bit of a refreshed outlook of what we are reporting here. Occupancy rates of 63%. We are getting closer into the corridor of 65% to 80% where we feel comfortable. Average length of stay, 3.4 days in the hospitals, more than 190,000 inpatient admits and we have more than 11,500 operational beds. You see our EBITDA margin has come off, as we've guided. COVID favorability has dropped somewhat. You saw that before in Kelvin's slide. Net operating income, we are really solid in an 8% to 10% frame, this is where we like to be. If you go tom the net debt movement, nothing surprising here, strong EBITDA contribution, some build in net working capital, which I think is good in an inflationary period. It's good to build inventories as costs are from a tendency increasing. We see CapEx coming back into the system. I think we talked about the roughly MYR 2 billion CapEx that we planned for this year. So we're starting well into Q1 and no major other cash outflows, MYR 5.8 billion in net debt left at quarter end. And if you look into the structure of this, the majority really comes from PLife REIT. It's a consolidated entity. Our real estate investment trust and from our Hong Kong operations, which have drawn substantial investments. On the next page, you see improving capital efficiency ratios. Net debt to EBITDA comes down, net debt to equity is now at 0.21%. Return on equity, 8.8%; and ROCE is also inching up. And with this, I'm handing back to Kelvin to look more into the operational details.

Thanks, Joerg. So on Slide 15, you then see here what appears to be a mixed picture with regards to movement of inpatient admissions from Q4 '21 to Q1 '22. I think that's a reflection of 2 things. One is the what appears to be final stages of the pandemic evolution and secondly, some seasonality effect. You can see inpatient admissions improvement or growth in Malaysia, that's because Malaysia was coming out of more and more largely has come out the movement control situation. In Singapore, there was an Omicron effect. And also there was the Chinese New Year seasonality, so that caused some slight dip. In India, there was a significant Omicron wave. But fortunately, the Omicron was a relatively mild illness in India. And you can see while it held back some electives, there wasn't concomitant rise in admissions from COVID-19, so some slight decrease there. As we enter into Q2, I do expect that there will be progressive growth or buildup of our business as usual admissions across all markets. Revenue intensity, you can see here, it's grown strongly for Singapore by about 20%, but this is likely to be a one-off situation in Q1 '22. There was emissions of COVID-19 patients that tended to stay longer in Singapore, but that effect will go away in Q2. Foreign patients continue to return to Turkey in a big force. Revenue intensity there. You can see here in Turkey has gone up 20%. That is a reflection of the appropriate price adjustments we made in line with the inflation situation. So as I said, we are optimistic that with the reopening of borders with the lifting of pandemic control measures in country, both foreign patients and domestic patients, I think will continue to grow even as the COVID-19 services melt off, the exception for that of that is probably in our China markets, where the control situation is still there. So go on to the country slides, starting with Malaysia, you can see here, giving a bit more color and detail in each country. So continued recovery with inpatient volumes, as I mentioned for the reasons I had already said. For this year, we will -- the key drivers are, we do expect to keep growing bed occupancy, grow via our stated cluster strategy, and we will tap into the fast-growing middle income segments. On Slide 18, Singapore's performance was resilience, stayed resilient through Q1. In Q1, though, we did have COVID-19 patients due to a public-private partnership where the Ministry of Health had sent COVID-19 patients in there, and that's why the revenue intensity was higher. But indeed, then some of -- quite many of the beds actually were occupied by COVID-19 patients that will drop off significantly in Q2. But on the other hand, then we expect our foreign travel and the other domestic electives to return to our Singapore hospitals. On Slide 20, Turkey and European operations, you can see its resilience, steady profits being maintained despite that inflation situation. Again, we have been able to compensate for it both operationally as well as through appropriate price adjustments. In patients admissions increased by 11%. Revenue intensity increased by 20%. And in fact, the occupancy was at 79%, one of the highest in our group. On Slide 21, you can see here how we have year-after-year increased our non-lira contributions in our Turkey and European operations. The light blue here where foreign patients is expression of the percentage of foreign patients' contribution to total revenues, as well as in darker blue then the contribution of European operations. So 14% of the total Acibadem Group's business in foreign patients coming in and 31% from the European operations. Altogether 45% now in non-lira or hard currency contributions. Now on Slide 23. In India, you can see here the progression Q1 in India was still affected by Omicron. But despite that, you can see growth year-on-year, 5% revenue growth, EBITDA also increased 16% to MYR 134 million. Now as I mentioned, there was what appeared to be -- what appeared to be some volume reduction on inpatient admission contraction year-on-year. But really, that's because of the Omicron wave, as I said, it was a mild illness for India and there weren't that many admissions. So for the quarter average occupancy was 62%. In Hong Kong, Slide 25. I'm really pleased to announce that despite the control situation because of a COVID Zero strategy. Gleneagles Hong Kong maintained its positive momentum, maintained its positive EBITDA. In fact, both revenue and EBITDA increased significantly from the year before. Previously, I talked about our 5 growth peaks. Firstly, return to normal post pandemic, filling up bed occupancies organically. -- getting -- firing up our acquisitions pathway. And then I also mentioned that our Global Laboratories business as one of our growth pillars. And I'd like Ashok to talk more about it today.

Thanks, Kevin. Good afternoon, everyone. We have seen the laboratory industry grow in a very significant manner over the last few years. There are some key themes driving this change, including wellness, digitalization, and there's been a big impact of COVID-19 on the industry as well. We believe these changes in the industry are systemic and will lead to long-term growth for the industry itself. For IHH, I think we are a clear vision of becoming a global laboratory service provider with deep clinical knowledge and capabilities. We are already pioneers and leaders in our markets of operation. We were one of the first health care groups that started PCR testing in our home markets. And we built our laboratory strategy on 7 pillars, as mentioned on the slide. And we believe through our group, through group synergies, focus on organic growth through expansion of test menus, focus on high-end tests, transformation of our operations, digitalization of our core platforms, we should be able to deliver a strong growth going forward. We go to the next slide, as you can see, we are already leaders in our markets. Malaysia, Singapore and Turkey, we operate through Pantai Premier, Parkway Laboratories, and Acibadem, a long history of more than 30 years, over 63 labs and 45 million tests that we conducted in 2021. India, Fortis owns SRL, which has over 400 labs and 30 million tests done in 2021. All this is set to grow going forward. As we can see through the slide, the financial performance and the growth has been steady. Obviously, 2021 was a very strong year. To some extent, '21 revenues and profitability were driven by revenues, which were related to COVID. But it was also clear that we were able to go in and with our expertise, be one of the first in our home markets to offer these service and support government initiatives for COVID-19. For '21, our revenue line was over MYR 2 billion. We had EBITDA of around MYR 688 million and EBIT of MYR 611 million. So as we move into 2022, there has been a shift, and there has been a change. To some extent, we are seeing, as Kelvin has mentioned and Joerg mentioned as well, a drop -- a significant drop in COVID-related revenues. So while our revenues on the top line have remained similar to -- or grown slightly compared to Q1 '21, our profitability has got impacted because the mix between COVID and non-COVID has changed and also the pricing, especially for COVID tests has come down in a significant manner. Our focus remains on driving non-COVID related tests, focus on higher-end tests and establishing new labs and new tests to help us grow the core non-COVID related revenues, going forward. A few things to highlight, across our labs, we are going to focus on specialized testing, be the referral labs for other private and public hospitals across the geographies we work, introduce new tests. This will be the core of our organic expansion. Digital transformation, a very big focus area for us. Our labs in Turkey will transition to fully paperless laboratory after they achieve the rollout of TELIS. Our laboratories in Malaysia and Singapore are now embarking on a big digitalization program to enable us to achieve higher efficiency and deliver better, faster service to our patients and customers. To conclude, the one thing I would like to reiterate is our focus on clinical excellence, which is supported by a number of certifications on clinical excellence and quality that we received from international and local accreditations across all our laboratories. And we believe this is a core thing that will help us as we grow and truly establish a global laboratories platform with a focus on delivering excellence in our laboratories business. With that, I'm going to hand over to Kelvin to go through the group's outlook.

Just before we go into that, great presentation, Ashok. Just for everyone who listens, what we will do from now on is provide this level of segment report every quarter as an add-on and overlay over our existing segments. From 2023 financials, we will change or we do plan to change our overall segment reporting, take out the labs from our BUs and report this as a separate business unit. I think this gives more transparency. It gives the required focus on this business and shows that we are really serious about growing our labs exposure.

So just to cover a bit on outlook. I think to be clear, there are some pressures as we move forward into Q2, 3 key topics. There is inflation, particularly in energy costs for our business. There is also inflation from the wages of the health care staff recruitment and retention will see increasing pressures as volume starts to build up and health care service providers require more staff. Of course, the COVID-19 normalization that I talked about, we do expect to happen. There will be a melt off of COVID-19 services. But of course, then we do expect that inflection to happen as well in Q2 and Q3 with buildup of the non-COVID-19 business. So for the rest of the year, there will be the short-term headwinds as we continue our journey onward, execute on strategies, get back to more business as usual. The long-term megatrends, of course, remain favorable. We will see sustained growth. Our new Care for Good strategy will continue to be our North Star in building trust and guiding us in all that we do for our stakeholders. So I look forward to sharing more with you in the coming quarters. Thank you so much, and we'll be happy to answer your questions.

Dr. Lou. But before we start, we'll first take questions from the participants on the call before moving to the questions on the webcast from the webcast participants. So if I can request for each participant to keep to 3 questions each and then thereafter you may rejoin the queue. With that, Operator, can you please proceed with the Q&A? Thank you.

[Operator Instructions] Your first question comes from the line of Rachel Tan from DBS.

A couple of questions from me. Maybe I will start off with medical tourists I think borders have reopened April. Could you give us some sense how fast or how quickly has medical tourism come back, especially for Singapore?

So yes, borders have reopened significantly. There's no more testing requirements now for both Singapore and Malaysia. The short answer to your question, it is coming back, coming back pretty quickly, particularly in Singapore, do expect that also to follow suit quite closely in Malaysia as well as India. Our Turkey operations, of course, had already seen a strong rebound in foreign patients from quite some time back and is continuing to see growth.

Maybe to follow up [indiscernible] do you expect that we could actually reach the pre-COVID levels by kind of end of this year?

I am cautiously optimistic. I think that's a likely case scenario.

My second question is on -- in terms of the inflationary pressures that you have talked about. Could you give us some sense, have you passed that through from a price increase? And if so, could you give us sort of price increase have you [indiscernible] in first quarter or likely to input in the rest of the year by the -- if you could separate for us by the different markets.

By and large, in our markets, we have taken price increases that are at least in line with inflation as we -- at the beginning of the year as we enter into this Q2, there are some new pressures, particularly around energy costs. I think that comes as no surprise. We estimate that the impact of energy cost inflation this year for our group in the order of magnitude of maybe MYR 80 million to MYR 120 million. Well, what effect will we see in -- for the rest of this year? I think there is some inflation effect. And it's possible that there will be a not big, but some effect on our margins.

So energy cost is MYR 80 million to MYR 100 million. How about labor costs? Are we seeing that coming through very significantly?

Yes. I mean labor costs don't swing or change so much. That pressure has really come with increased wages across markets, most of them at the beginning of the year. In Turkey, the inflation is high, and I think there's a watch out there. But again, typically, even for Turkey, we have been able to compensate for that by price adjustments.

And probably my third question is on the [indiscernible] and thanks for the disclosure. And you spoke about some very strong growth moving forward. Could you give us a sense what kind of growth -- normalized growth level are you expecting? And what kind of normalized margins are you expecting once the COVID is off the radar.

So I think what we expect to see in non-COVID revenues to come back. Our focus remains on a few aspects. One is expanding our test menus, focusing on higher-end tests and expanding our laboratory footprints. The idea will be -- is to expand a little bit out of our own hospitals to grow the outreach business. So we are going to benefit from '24 as the medical tourism comes back. And as we get more revenue from our core hospitals, the focus is also on driving our outreach business. I think it will be -- we need to see the next few quarters to roll to see how the normalized business pans out. But just to give some color, we are seeing the normalized business above the levels of what we saw in Q1 of last year.

Okay, maybe before COVID could we say that what is the growth level like? Is it single-digit growth? Or is it a double-digit growth, high or low single digits?

I think the industry has seen a sort of double-digit growth. I think for us also, it's -- the growth is not strictly comparable because we've had 3 labs in SRL, which has come in after the acquisition of Fortis. So I think the numbers will not give you the full picture. But I think it's -- it will be -- it is, to my mind, a double-digit sort of a 10% to 15% growth is what the industry has seen. And I think we need to see how the rest of the quarters pan out to then say, post-COVID normalized growth sales around what levels?

I think it's clear the core business will be exactly in that range, 10% to 15%. That's actually the target. Now you'll not see that in our numbers because we have that COVID effect, and we have that melt off in the COVID effect. So I think we need to be a bit cautious on how it translates into our numbers. Core business, absolutely double-digit growth, 10% to 15%, that's absolutely achievable.

Okay. And margins, 32%, is it a normalized margin?

Well, the current margins are clearly impacted by a sharp decline in COVID-related revenues and the price of COVID tests itself. So we do hope these margins to level off and hopefully see a slight increase over the course of the year.

Our next question comes from Nicole Goh from UBS.

My first question is with regard to your margins. I think in particular, if we look at the Singapore EBITDA margins as well as India, there has -- there was a decline on a Q-on-Q basis. So first quarter versus fourth quarter. And if you look at, I think Singapore margins seem to be quite volatile, ranging from, I think, high 20s to even 36%, 37%. And in India's case, I think the margins have fallen about 4 percentage points Q-on-Q or even versus the last 3 quarters. So can you just give us a bit of color on what has happened there? And what is the expected sustainable level of margins in -- especially in those 2 geographies?

Thanks so much, Nicole. So let's start with Singapore. Really, it's still -- there are 2 big effects. One was the Omicron wave. The other one was seasonality. So in Singapore, what happened was that quite a large number of beds were used up for COVID-19 treatment. This was the public private partnership program where we're treating patients from the public sector. On the other hand, too, as I said, there was the seasonality to the Chinese New Year, which typically has lesser patients. And of course, the uplift effect due to PCR testing that we had from previous quarters also started to reduce in Q1. So a combination of all this was what brought that margin down. Now the high 30-over percent tight EBITDA margin that you saw in previous quarters, that's unlikely to be -- to stay. As I mentioned before, that was largely a result of a very unusual large amount of COVID-19 services, particularly laboratory testing. On the other hand, is the situation of the margin of what we saw in Q1, likely to just stay that way. I don't think so. I think Singapore, you'll start to see, as we normalize, going back probably towards the high 20s type EBITDA margin. It's really simply revenue came down, right? Revenue came down because admissions came down. Admissions came down because while there was a Omicron wave, big Omicron wave in India, which deterred normal elective patients. On the other hand, there wasn't much admission of COVID-19 patients. So admissions came down, revenue came down, and therefore, the margins for the same type of overheads came down, but we expect that to recover as we get into Q2.

And also secondly, on your net finance cost, I also noticed on a Q-on-Q basis, it's actually fallen quite a fair bit as well. I mean, one of the good things I just wanted to test this to see whether this level of our net finance cost is actually sustainable.

I guess we'll see here the effect on the one hand of a translation effect from Turkey in terms of finance costs in the second is, of course, we are paying down debt. We have substantial cash in our bank account. And we are continuously paring down debt to reduce debt levels. Now going forward, I think we all read the newspapers. So I think we have to assume that there is pressure coming from interest rates. Does it have a very material effect? Maybe not as big as could be expected in other markets. We also have a very low leverage level. But I think the bigger effect is going to be our repayment of perpetual bond. Currently, our perpetual bond is treated as equity. So the interest payments that are treated as dividends. Once we repay this, then we expect to repay it at least with half of new debt. These previously dividend payments will now be cost of debt. So you will have a little bit of an uptick in our interest expense line.

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

A few questions on my end. Firstly, if I could direct my first question at Joerg. This quarter, we saw [indiscernible] benefiting from some different tax assets in Acibadem, which resulted in your effective tax rate at about 8-plus percent. I just wanted to find out what would be -- first of all, can we expect this to go on further? Or what would be a more normalized level of tax rate that we should expect for the year, considering that [indiscernible] not more and all that as well?

Yes. You've noted very well for the last couple of quarters, we had quite some positive surprises out of Turkey and have Evren here who may be able to give us a bit of an explanation of what this tax as it is in this quarter. I don't expect that we have this happening every quarter. Of course, it's a great windfall but I think we'll fall back on a normalized, much more normalized tax level and tax rate. We've not made yet a real outlook on what the long-term expected average tax rate would be. We can come back to you on the that with an analysis in the next quarter.

So would it be safe to assume a more normalized tax level that looks like 25% or so for the group?

Much more reasonable.

And then for my second question, on India, at least based on the slides, it seems that inpatient admission is down 8% year-on-year. But if I look at occupancy rate it has stayed unchanged at 62%. So do you mind helping us reconcile the difference in this trend, please? I would have expected that the drop in inpatient admission would have also resulted in a drop in occupancy rate as well.

We sold the hospital in the meantime from last year to this year. So I think you have some beds that came off the base denominator. You always have some minor changes up and down with operational beds, but I think the major impact here is from the divestments that we had.

So it's the volumes drop that is due to the disposal of the hospitals that you did earlier this year but that's probably a safer place that's the main reason, right?

Amanda, you want to ask the next question? Or we would like to move on to the next one. Joerg answered it.

Okay.

[indiscernible] Sorry, Amanda.

If I could just ask a little bit more on the price hike. Would you mind sharing with us what was the quantum on a blended basis of the group and for the individual markets, how much would the price increase in terms of percentage points? Are you able to share that with us?

I think it's not very useful to take that blended because the markets are just so different. But I think it's fair to say that it's roughly in line with inflation -- with headline inflation in most markets that we are at.

And if I just could squeeze one last one. So now that seasonality is back and we're going back towards a now new norm, so in a typical seasonal is it -- is first quarter typically the weakest and margins the weakest then as well?

Yes. I think it's fair to say that if you look at our historical trends, the first quarter typically is not the strongest quarter.

And what would be -- maybe a strong RASK for maybe a first half, second half for us to kind of look at if we wanted to see whether this could be in…

I think this year, this year is not going to be a year that follows the typical patterns really because of the emergence of coming out the pandemic situation. Q1, there was this huge Omicron wave that is still going through affecting Singapore, affecting India, Malaysia, China and Hong Kong, of course, it's still in a very much controlled situation. Q2, I think we expect normalization, especially in Malaysia and Singapore. We do see a strong return of domestic patients. In Malaysia, some growth of foreign patients in Malaysia. In Singapore, we see a strong rebound of foreign patients coming in and then progressive growth of domestic patients as well. So that's it -- that's what we see in Q2 in Turkey. And Europe, we see very high bed occupancies continuing. In India, we do see -- I do expect a recovery of business as usual non COVID patients in India because in Q1, there was a fairly -- there was a depression in elective admissions because of Omicron wave. Hong Kong, we expect steady growth because the factors remain the same. Our hospital is growing from strength to strength. So we expect progressive show further growth in our planning this Hong Kong hospital.

Our next question comes from Xuan Tan from Goldman Sachs.

My first question is on ROE. Can you give us a sense of the ROE excluding COVID impact?

Look, we've, I guess, guided that we believe the underlying ROE is somewhere around 6%. So we ended the year with 8.2%, I think, we said we're probably somewhere around 6%. I think if we do the math on that, look at the LTM trailing, it's probably a little bit higher than that. We still believe there is a COVID favorability included. We still believe there is some underinvestment during the COVID period. We do have new investments coming online in Turkey. So I think we should not get ahead of ourselves and believe that now 8%, 9% is the new normal, of course, we'll try to stay there. But I think it's probably closer to 8% than to 6% in terms of the underlying return on equity levels.

And my second question is around pending M&A. I think we've read about potential IMU divestment in also Ramsay Sime Darby. So the question is what's the thought process behind that? And is Indonesia, a country that you want to be in over the long term?

Thanks so much. So I've spoken previously about our -- what we see as core business, how we intend to develop that by our cluster strategy, our core business, of course, is our hospital business, we want to grow that via the cluster strategy. That means that in areas in markets and in cities that we are strong and we see growth, we do want to add on more hospitals but bolt-on acquisitions that we preferred. Is it possible also that we enter into new markets? Yes. And we do that choosing markets that we know well, that we have good brand presence in, preferably in fairly adjacent or close by. And so I think a market like Indonesia would not be a surprising choice. Now if we then choose to enter into a new market, we will follow the same cluster strategy logic, get into one city, start with a few hospitals and then definitely grow that out into more. And I think the logic for that cluster strategy I have talked about before, you do get efficiencies of getting revenue, brand recognition. Of course, you get many efficiencies around overheads and costs. So I think that's the explanation for what we are trying to do, the due diligence is going on in our process with the Ramsay Sime Darby intended acquisition. And you can see that the -- that business has hospitals in the Klang Valley, which is exactly in our cluster strategy and it also has hospitals in Indonesia.

And just one last question on China. Can you share some colors on your strategy there and also Gleneagles Shanghai?

I think we've been very clear on China. We need to find a new way of working there. We've started this business. It hasn't ramped back up as we had expected. We have strategic challenges. We now have a Chinese environment that starts with lockdowns, that starts with a more challenging environment for private investors, especially foreign private investors. So I think this is one of the topics, one of the burning platforms we need to resolve. We have discussed that we need to find new ways of working. We started with Chengdu, you shouldn't be surprised to hear news about Chengdu soon. We continue, of course, our ongoing business. The team does a fabulous job managing through this crisis, starting the hospital, manning the clinics and trying to make the best out of it. The long-term strategy is clear and we have not changed on that, and we're in the process of executing this. We've engaged advisers to help us on this the COVID lockdown is not helping the speed of this execution, let's be clear.

And any more updates on Gleneagles Shanghai?

Look, in Gleneagles Shanghai is also affected by the construction. So construction was not able to continue in the last 2 months. So we are more or less 2 to 3 months delayed now. We believe this situation continues another 1 to 2 months. So we are now somewhere at the end of H2, where we thought originally that we are at the early part of H2. We continue to ramp this up even if we want to find new position around our ownership of this business. We still need to ramp it up. We still need to make it a success. We still need to get doctors engaged and the specialties up and running. So operationally, everything continues. It's delayed about 4, 5, 6 months due to this lockdown, but it continues as planned.

Our next question comes from Divya Gangahar from Morgan Stanley.

My first question is just a follow-up on Singapore. Could you give us some numbers in terms of what's the percentage of foreign patients in the first quarter? And have you seen that ramp up nicely in April, May once the borders opened? And related to that, how has COVID kind of tapered in April, May versus the height of the '20s that we saw in the first quarter. I also wanted to clarify on Singapore. Kelvin just mentioned that Singapore margins could settle in high 20s, but they were above 30% even before COVID. So I just want to clarify that margin remark. So that's my first question on Singapore.

Thanks so much. So I think foreign patient revenues in Singapore for first quarter was probably something like 6% to 8% of revenues. Most of the effect came through in March, which was the beginning of sort of significant return of foreign medical travel. Since then, we have seen a strong increase in April and then in May. I guess, try not to get into too much guidance for Q2, but suffice to say that it has been strong. I don't think we are so far away from what it was pre-pandemic. With regards to margins, yes, high 20s, low 30s, I think, is in the ballpark for Singapore. What I was trying to express, I think really was at the 35%, 36% levels that we saw in a couple of previous quarters, it's not usual sustainable levels. That was anomalous due to a lot of COVID-19 testing services.

And just in terms of the COVID tapering, like if you look at April, May, I mean, has the COVID contribution gone below like 10%, 15% already because of the lack of testing?

I would expect so.

Maybe more specific to that. In Q1, we've already reduced substantially the testing activities. So that has happened. The whole border screening operations have reduced substantially. We still do cooperate in a public-private partnership to provide beds to the government. That has been in our books for the whole Q1. So that was a good favorability. And this is dropping off now in Q2. So we do need to see that COVID in Q2 will not play that major role. It is really the return in tourism that we see coming back very, very strong. Now as to your margin question, look, we've talked about inflation. We talked last year about cost inflation and staff costs, salary cost increase. We see now electricity costs spike. So I think we need to see how we land here, ultimately. We talked about price increases. Of course, this will play a role, but I think the ranges that Kelvin mentioned are where we believe this will continue.

My second question is just on Fortis. And of course, we continue to wait on the Supreme Court's verdict. But assuming that, that comes through, just wanted to understand what are the first top 2 priorities now that you've been talking a lot about the laboratories business. I mean, in terms of number 1, number 2 priority once it comes through in your favor, what would be on top of the list.

Look, I think the first course of action is, of course, to execute the MGO. We will be required by the regulator to do this in rather short order after the Supreme Court resolution has been passed. We are preparing this, and we will be ready for this whenever, in the course of a couple of weeks, we will be on the road to execute this MGO. The second part is really, there are some corporate restructuring actions that need to happen in Fortis to address some inefficiencies in the corporate organization of Fortis. We are preparing them. We know exactly what we need to do, and we will execute those. And yes, of course, you are alluding to the SIL put option and the private equity owners who are, of course, interested to have discussions with Fortis on a potential buyout. These discussions, on an informal basis happen to prepare ourselves to position ourselves. This is a great business. We are interested in it. But of course, the price needs to be right. If you look at market valuations in India and the health care space over the last couple of weeks, I don't know, Ashok 30%, 25%, 30%. The lab businesses have eroded in terms of market cap.

I think that trend, I think we've seen not just in India in most of the other markets as well as the COVID related revenue comes down, we've seen the valuations normalizing as well.

And so this discussion is a valuation discussion with the private equity owners. And if reasonable people come to reasonable resolutions, that is an interesting objective. But there are also great hospital assets in India. And look, we've started well ahead of the Supreme Court clearance in discussing with the Fortis team on their own organic growth but also acquisition-driven growth strategy on hospitals. There are some great targets out there. And the team is doing what is needed to be in the best position to win some of these projects.

And my last question is just what is the accounting implication exactly if Turkey is deemed to be a hyperinflationary economy. I mean from an accounting perspective, what should we be expecting if that happens?

Pass that right to Evren who sits next to me, I don't know if he is in the picture, but he is on the microphone. So maybe, Evren, what is your thought?

We are currently evaluating that. Basically, the adjustment will be all the nonmonetary assets on our balance sheet will be re-indexed. So we will have a completely new numbers of mostly fixed assets because if you look at the adjustments, 90% of the adjustment will be from the revaluation of our fixed assets. So like I said, we're still evaluating the impact. And as we have more clarity we'll share that with you.

Stages in the assessment and we'll probably in the next earnings release call organize maybe half an hour or 15 minutes to guide you through the impact and how this has been calculated so that the team here has clear transparency on what happened.

Our next question comes from Huan Gan from Macquarie.

I just have a question about the COVID-19 testing stuff and the lab revenue. So if you look at the EBITDA margins over the past 3 years, FY '19 for the lab segment, the EBITDA margin was 25% for FY '21, the EBITDA margin [indiscernible] is 3%. So is it fair to say that the COVID-19 testing margins are probably mid-30s and the regulator is saying it's probably mid-20s. Is that fair to say?

I think your assessment around excluding COVID mid-20s, that's sort of right level. I think COVID-related margins differ from in all the markets because COVID pricing was very, very different in the different countries. But yes, I think if you remove COVID, mid-20s is -- would be the right sort of normal sort of target margin.

And then in terms of revenue, is it also fair to say that COVID-19 testing revenues were about MYR 800 million thereabouts based on -- just based on this trend?

I think at this stage, we are not providing any breakdown or guidance. I think we've given you a split. If you look through the split, it talks about IHH and outreach, but the outreach has COVID and some non-correlated out -- pure outreach related revenues as well. The outreach revenue is not only COVID.

I think if you want to triangulate it back and I see where you get your MYR 800 million from, I think that's a bit too simplistic. The core business has grown. So if you melt off COVID, you're not now suddenly dropping back to the MYR 1.3 billion or whatever, there has been substantial growth and not everything is going to melt off. So I think we'll continue to see a nice growth rate.

And I think like you mentioned in the beginning, I think as the quarters advance and as we go into 2023, we will be providing a lot more details around each market. Where we -- where is the revenue coming from, what the breakdown of the revenue is, et cetera.

And in terms of the Indonesia -- sorry, with the Ramsay Sime Darby acquisition -- potential acquisition, with the Indonesia operations, you mentioned the FX is going to be another cluster. But is the thinking here just kind of just the funnel medical [indiscernible] on the Indonesia operation to Singapore. Is that kind of the thinking there?

Thanks for that question. No, the answer is no. That will not be the case when we enter a market, we fire up a cluster, then that has to stand on its own that has to serve the domestic patients in country in that cluster. I'm sure, of course, there could be some synergy positive effects. As you do know, there are Indonesia for Singapore is the largest foreign travel referral market. So of course, we do expect some referrals that comes over from there. But that cannot be the main reason for why we enter a market.

Thanks, Huan Gan. I think we have gotten quite a few questions from the webcast. So I think we'll address them now. So first from [ Alex Goh ]. For the acquisition of Ramsay Sime Darby, will there be some near-term EPS decline from the lingering pandemic impact?

So with every acquisition, of course, in year 1, you have some onetime charges. You've not ramped up synergies completely. So I would not rule out that there's a very short-term EPS pressure. Our objective is clearly that from year 2, we want to be EPS accretive. Well, we need to work hard to get there. There's a lot of synergies to be lifted. We need to get good financing for this transaction. And I'm sure we will. So from year 2, I think you will see that we are getting closer to EPS accretion.

The next question, which is from [ Lee Jo ]. I think that one Divya has asked earlier. So we have obviously answered, so I'll move on to the next one from [ Aci Wang ]. The first is, what is the outlook on Hong Kong for Gleneagles, when can we see EBITDA margins reaching 10% and 20%, respectively? Maybe you want to answer that before I move on to…

So Gleneagles Hong Kong is growing from strength to strength. In fact, if you look at the entire COVID-19 period, it was possibly the only hospital in the group that didn't see contraction. It's not as fast as it would have been without the COVID-19 situation and the social restrictions. But EBITDA has been -- has turned positive since May last year and continues to be positive despite a significant restriction, a pandemic restriction in fact even in Q1. When can it reach 10%? If not for that restriction, I think we would already have reached 10%. As soon as those restrictions start to lift, we are hearing that by July onwards, there appears to be more and more loosening, then I think that will accelerate quite quickly. It is in single-digit margins now. But as soon as those restrictions start to lift, I think getting to 10% will be quite quick, but it really depends on how fast that lifting comes.

How much of Gleneagles Hong Kong is currently local patients, Mainland and others?

It's almost entirely local patients, of course, because of the borders closure. But again, I hear that there is a desire like [indiscernible] by July, the borders between Mainland and Hong Kong will reopen. And then, of course, we are hopeful that patient from Mainland starts to come in.

Question #2, what is the upside margin potential for Turkey? Can we see EBITDA margins for Turkey going up to 30% plus?

Sure. I think Turkey is strong. We are already at 80% bed occupancy, margins 30% normal 30% not possible. And Evren, do you want to add on more?

Yes. Maybe just one caveat to that. As you know, we have a new greenfield hospital coming in the pipeline later in the year. So that will probably have a somewhat of an effect as it ramps up, but we're expecting a very quick ramp-up. It's located in a very good location within a central location in a hospital in Istanbul. But overall, I think that's the ultimate goal to improve our margins as we move along, not only in Turkey, but also in our European business.

If you look across all the markets, Turkey is now one of the highest performing businesses in terms of EBITDA margin, is on level of where Singapore is, and that's fantastic. So it is really one of our earnings pillars. We go into this difficult period now with hyperinflation. Let's see how we get out there. Let's get this hospital online and then see how we get to the 30% plus.

And the last question is how much does medical tourism make up of Singapore, Turkey, Malaysia now?

Let's start with Turkey. Foreign patients' contributions to Turkey operations, that means Turkey the country for Acibadem only is about 25%. That's mostly in euro currencies. And that's continuing to grow. And I think that's part -- that together with that strong brand, I think despite some transient situation that Joerg and Evren mentioned in Q2, Q3, I think the long-term trajectory for high EBITDA margins in our Acibadem business in Turkey, above 30% is likely. In Singapore, medical tourism in Q1, I mentioned was probably in the 6%, 8%. Most of that came through in March. So I think you can work backwards and see a much stronger effect in -- coming through in Q2. Pre-pandemic, Singapore had about 25% of revenues coming from foreign patients. I would not be surprised if you get close to that pretty soon. Malaysia, it's early stages of reopening. So we'll see. We do plan to make medical tourism a strategy for Malaysia's growth. We see potential beyond what was traditionally medical travel that went to our Penang hospitals, particularly Gleneagles Penang. But now we also see in addition to that strong potential for our flagship hospitals in Kuala Lumpur, including Prince Court, Medical Center, Gleneagles Kuala Lumpur Pantai Hospital, Kuala Lumpur.

Next question comes from [ Nazmi ]. Hi, Nazmi, afternoon to you as well. So can you explain how will the group be impacted or its P&L will be impacted as Turkey is expected to be classified as a hyperinflationary economy.

Look, just a very high level, what happens is assets will be rebased re-indexed. Typically, this leads to a higher level of depreciation. So we need to see how that is then ultimately be computed. It also leads to -- because the assets have a higher value, it needs the new base in assessing impairments. We don't see any material risks there. But that's also a test point that needs to be looked at. We've engaged an accounting firm to help us get through this. The local team is working on their own ERP to do things that we need to find out exactly how is this impacting, and we'll do that in the next quarter and have a respective commentary, Evren.

I mean with just an additional note, the impact to our P&L for 2022 will be limited to the indexation starting from 1/1/22. So the prior periods will be reflected in our equity.

Next question is from [ Sean ]. Price hikes typically only conducted at the start of the year. Just wondering if there is a possibility, where inflation continues to run throughout the year and prior price hikes lagging behind?

Thanks, Sean. So we don't have a standardized lumpy timing for price hikes. I think we review from time to time. We make adjustments that make sure that our patients still get great value from the care we provide. We do, of course, need to follow inflationary trends. I think in the track record of our company across all our markets, including in Turkey, we have always been able to manage for inflation, even if it runs a bit higher in some markets like Turkey. But this year, as we go into Q2, Q3, is there some chance that it could lag behind somewhat. Possibly, I think, particularly around energy costs. It's a big topic. I mentioned the potential impact to us. Do we then review and consider if you could take on more price hikes to make needful adjustments, I think we will. And I think it's fair to say that Turkey particularly is a situation which is seeing that really big inflation, and we may have to make some then further adjustments.

Maybe I just wanted to add an additional note on the overall. I think everybody is so curious about what's happening in Turkey. If you look at our price adjustments, our price adjustment to our patients are based on the CPI in Turkey. But when you look at the medical inflation in Turkey, which represents a bulk of our costs, it's less than the consumer price inflation. So we enjoy that difference, which is going to our margins. So that's, I think, something important. And one other thing is these high inflationary periods, companies with strong balance sheet like Acibadem, we also enjoy a lot of upside by doing a lot of operational efficiencies and also with the improvement of our medical tourism, case mix, a lot of our patient business coming back. The segment that we cater in is also not affected from the macroeconomic scheme in Turkey. So those are the things that, in fact, we enjoy certain benefits come out of these inflationary effects.

Thanks Evren. Also from Sean, any updates on your current due diligence on the Ramsey deal? Has KKR's privatization bit affected the process in any way?

So thanks, Sean. I think a quick answer, a work in progress. And we hope the KKR privatization doesn't impact, but we'll have to wait and see how things pan out.

Another question from [ Maqui Wuh ]. With a 20% co-pay from insurance, are we seeing local patients in Singapore shift back to public hospitals?

Thanks so much, Maqui. So the copayment as a strategy in Singapore has always been there. I think what you may be alluding to is that there has been a fairly strong or a fairly big portion of the Singapore population with MediShield and then private MediShield and the copayment could be less. I think that group is still there. The rest are the patients, which have had to have copayment has also been there. So long and short is there isn't really that effect. In fact, the other factors that continue to drive the demand for private health care, growth in private health care. Well, firstly, for health care services overall will remain intact and for private health care, of course, continues to be there. So no, that will not cause that shift or that reduction in demand for our services in Singapore.

Thank you, Dr. Loh. I think we have finished the questions on webcast. Maybe back to you, Operator. Maybe we have time just for one last question before we wrap up.

Our last question comes from Rachel Tan from DBS.

Just one very quick question. I'm just thinking for hyperinflation situation in Turkey, would that actually impact your medical service and if you continue to raise the prices, could that then make you not as competitive to the health care in the region.

Rachel, we -- for medical tourism patients, we charge in hard currency, which is dollars and euros. So that has a completed separately pricing scheme. That's why -- I mean, the hyperinflation will have no effect at all.

I think that's the end of our session. Now we will now then conclude the IHH Healthcare first quarter financial results briefing. Thank you for joining us today. And if you have any further questions, please contact us at [email protected]. Thank you, Operator, and you may disconnect.

Thanks, everyone.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.