IHH Healthcare Berhad (IHH) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to the Second Quarter and First Half 2022 Financial Results of IHH Healthcare Analyst Briefing Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 26th of August 2022. 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 afternoon, and thank you for joining us. I'm Penelope Koh from IHH Investor Relations. Welcome to joining us for our second quarter results briefing where we are doing it live via -- live -- we're doing it live via video broadcast, which is also available on our webcast. And we are beaming this live, like I said, from KL, Malaysia. So with me today in the room, I have Dr. Kelvin Loh, Managing Director and CEO. I also have the pleasure to invite Mr. Evren Gence, who is Deputy CEO of Acibadem. And of course, last but not least, our group CFO, Mr. Joerg Ayrle, who is joining us virtually from Singapore, right? So the results materials are also available for download on the IHH website and the webcast. As for the sequence of event, Dr. Loh will first touch on the key performance for the second quarter, and we'll have Joerg share more about the financial performance, and Dr. Loh to continue with the operational highlights before we wrap up the session. And thereafter, we'll move to the 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 at this analyst presentation. Let me start by zooming out and just reflecting on our journey for the last 10 years since IPO. This is our 10th year anniversary, which we'll celebrate this year. We have grown from strength to strength. We have grown tremendously as a company, both organically and through acquisitions that has brought us here today. So I wanted to reflect on that. Thank you for your partnership and your support through all these years. We have built strong brands in the countries we serve. We have built trust with the patients that we serve, and we intend to continue to -- double down on this journey to deliver care for good, to touch lives, to transform care, not just for this generation but for generations to come. Now in Q2, I call it the COVID inflection quarter. This was the quarter that COVID services has dropped off significantly. In fact, going forward, I think we don't intend to report on our COVID services anymore. But in exchange, our business as usual, our core business, non-COVID, has rebounded really strongly, both domestic as well as foreign patients. You can see the effect here on our revenue where we have grown. If I take -- draw your attention here to the bottom row first, which reflects our operating performance, you can see here revenue has grown over last year same period despite that COVID fall-off. You can see EBITDA and net operating income sort of slightly lower, and I think that's to be expected because as we go back to -- and have that rebound of non-COVID business, then, of course, the cost has to come back with that. There's some normalization of those margins in some markets. And all in all, you can see our net income having grown strongly as well. Now the top row here has that effect of applying MFRS 129, which we'll get into some detail. It does change the numbers somewhat accounting-wise, mix the EBITDA slightly less, mix the net operating income less, but the net income actually more. But again, we'll get into some of those details later on. Joerg will explain that. On the next slide, 6, you can see that journey through the whole COVID-19 time. Now as we reach our COVID inflection quarter, the revenues have remained robust. I think in the last analyst presentation, we had alluded to a likelihood of a softer Q2 because of expected COVID fall-off. But I must say that, actually, we have been able to replace that business with the return of the -- our non-COVID business. And you can see here our -- thereby our revenue being much defended in Q2, not as soft as we thought it might be. On the next slide, you can see the effect that I've talked about. Right now, as a group, our COVID revenues are only 3% of our total revenues. Much lesser than what it was in Q1 and certainly much, much lesser than what it was in the same quarter last year. So I hand over to Joerg to get through some financial details, and then I'll come back, talk about operations.

Thanks a lot, Kelvin. And look, this is a great exciting quarter for us finance people. We don't have changes in accounting policies of this magnitude every year. So we did a lot of work to get these IAS 29 or MFRS 129 numbers out. This is what we're presenting here. As Kelvin mentioned, revenue growth is intact, mainly from a rebound in local and foreign patients, and this is overcompensating for the COVID melt-off. We see this especially in our Malaysian business. We see the numbers a little bit later. We've guided towards the softening of our COVID-related services. We've also guided to higher costs. As Kelvin has just said, the COVID business is now basically no longer any material contribution to our business. Our EBITDA has decreased by 12%. If we include IAS 29, if we look like-for-like to prior year quarter, we've contracted 8%. This is absolutely in line with what we had expected in terms of what we said this COVID-19 softening would do. In terms of net operating income, we've basically remained flat to prior year. If we exclude IAS 29, if we then bring in, and I'll share a bit of that later, if we then bring in the increased depreciation and amortization, our net operating income decreased 32% as a result of this higher depreciation and amortization. Net income increased by 27%. Again, this has a very large element of IAS 29 onetime gains, MYR 295 million in monetary gains that we have recorded. If we look at pre-IAS 29, it's still a very strong increase in net income, 17%, and some great incentives -- tax incentives and other benefits that we have been able to report out of our European business. As I said, these numbers are after MFRS 129, and we'll share it in a minute. ROE trajectory remains on track. We are now on 8.8% return on equity as reported. That is, again, a little bit of step up from prior year, where we had 7.2%. I do want to call out, though, return on equity is, of course, calculated based on reported net income. So we have to take a little bit of a cushion in here for the extraordinary gains that we had over the last 12 months. So we are likely somewhere in the range of 7.5% -- 7%, 7.5% underlying return on equity, and that's really great if you compare to where we have been coming from. Balance sheet remains super strong. Very strong cash management, very strong cash generation, and we have a MYR 4.3 billion cash position. On the next page, you can see this resilient very strong performance. And we've added in here the 2019 comparison. And you can see how strong our top line has been growing, how strong our EBITDA has been growing. Even including IAS 29, we are nearly at MYR 1 billion, where in 2019, we have only been in the MYR 774 million. Also net operating income, same thing. But here, you can see the difference between IAS 29 and pre-IAS 29. We'll come to explain that in a minute. Net income up 27% on a reported Q2 '21 basis. Paid occupancy rate is at 67%. So we are inching up into the range where we feel a lot more comfortable with our underlying efficiencies. On the next page, very quickly, geographic business unit distribution. Our largest earnings contributor by far remains Singapore with 30% (sic) [ 29% ] revenue, 42% EBITDA, followed by Turkey and Europe that despite all this macroeconomic headwinds is growing tremendously and has a great, great earnings contribution. And on par, we've had Malaysia, quickly followed by our investments in India, which is, of course, as you are aware, primarily the Fortis investment. Now with everyone here on the call, on the next page, we're guiding to the escalation -- escalating inflation in Turkey. And everyone, I'll be asking you in a minute to comment a little bit about what you see in the market. But this page is basically the root cause for us switching to IAS 29 or MFRS 129 because in a 3-year period, inflation has reached -- exceeded 100%. We are obligated to adopt this hyperinflation accounting standard, and it's basically restating the complete financial statements, balance sheet and profit and loss statement. Now if we look forward and maybe everyone you can help comment on this, because of the expansive and growth-focused Turkish macroeconomic policies, I think, at this stage, there's not really a sign of softening of the inflation trends. But maybe Evren, you can share some views.

Thanks for the outlook macroeconomic. As you mentioned, in the first half of the year, we have seen the inflation uptick, and we recorded around 42% inflation in the first half of the year and the official inflation in Turkey right now is at 80%, which the current outlook is estimated to stay around these levels, maybe even go a little bit higher towards the end of the year. The only thing is this increase, which started towards the end of 2021, starting in December, where we had a monthly inflation of 13%. So as we expect the inflation towards the end of the year to start softening because of the base effect, the pace will still be there. There will still be high inflation. But I guess, with regards to the rises in the prices in the market, we expect a little bit of a reduction because of the impact that I mentioned.

Okay. Great. Thanks a lot, Evren. Let's jump right to the next page. This is where you see the actual numbers. And it's basically 5 effects that we have singled out here, a couple of smaller ones, you'll see when you look at the details. But these are the 5 main topics we want to talk about. One is re-indexing of all the assets -- net assets in our balance sheet. So we re-indexed over the last 10 years, taking inflation rates into account, and it led to an increase in our monetary assets by MYR 2.7 billion. That's quite a massive uplift for the assets we have in Turkey. And it is basically, if you think about ceteris paribus, if there would be no inflation from now on, this number would not change. This would just stay MYR 2.7 billion, and it would no longer increase. So this number will continue to go up with future inflation. So if the inflation continues from now on, which we all expect, this number will increase, and you will have further restatements in our balance sheet. So the balance sheet re-indexing is plus MYR 2.7 billion in net assets. We then also re-indexed all the P&L lines that we had above EBITDA, and the effect out of this is roughly MYR 36 million higher revenue. And unfortunately, MYR 36 million coincidence the same number of lower EBITDA. Now this lower EBITDA is the result out of foreign currency conversion. If we look at the re-indexed Turkish lira, EBITDA effect is basically 0, but we have a currency effect in here from choosing different exchange rates in this hyperinflation accounting. The effect is minus MYR 36 million. All these are effects that we cannot have an estimate on how they continue going forward because they happen every quarter as and when. Now the main impact is now under Item 3, and this is an effect that will remain with us. So this is not going to disappear out of our P&L going forward, and that is the depreciation and amortization from the higher net asset value that we have in our books, and the effect is MYR 85 million. There's another little effect out of tax release. So overall, the continuing effect in our P&L is approximately MYR 100 million. You see in the bottom line, this is the effect for 6 months. So if you want to look into a forward forecasting, you have to divide this by half. So quarterly effect out of the increased depreciation and amortization is between MYR 50 million and MYR 60 million, and this will remain with us. This can go up slightly with increase of inflation. Now the fourth element is a onetime item. It is the effect out of revaluing all the assets, but not having higher liabilities at the same time. So there is a monetary gain on assets and liabilities of MYR 295 million, and this gives us the kicker in Q2 to exceed and increase our net income. Now this number will -- if there's no inflation, there will be no more of this effect. But if there's a continuous inflation, we will continuously have such revaluation effects in our books, but only if there's inflation. And the five -- the fifth aspect is because of the higher asset value in our balance sheet, we do need to, now on a quality basis, perform impairment testing. We have done that for the end of Q2. The good news is there is no need to impair the increased asset value. And the logic is also clear. The organization is very good in adjusting price levels and adjusting the sales price to the cost inflation, which means the impact on our margin is identical to the inflationary uptick. So we do see an increased earnings power in Turkish lira terms. So there is no Q2 requirement to impact this. I want to pass quickly to Evren again. Do you have any additional comments on this hyperinflation and how it affects you in the market?

No, no, maybe in case if there's any questions, I'll be more than happy to respond. But I think you were on point. No comment.

Okay. Cool. So on the next page, I don't want to go through this, these are the detailed numbers. You can all read through, but basically, we've summarized before. If you go to Page 15, net debt movement. We've started the year with MYR 5.9 billion in net debt. We had a strong EBITDA performance. We then had capital expenditures of rough to MYR 800 million. We paid some taxes. We paid dividends, the increased dividends, as you are aware, and we are ending the first half year with MYR 5.6 billion or slightly reduced net debt. What you can see here on the capital expenditure, we've guided towards around MYR 2 billion for the year. I think we're likely going to be a bit short of that. I don't think it's going to be MYR 2 billion, probably a little bit short. And what you will see in our Q3 numbers, we have, in July, repaid the perpetual securities with cash and new debt, and we are reducing our interest outflow -- cash outflow by roughly 50%. First of all, by using a little bit more than 1/3 of this reduced idle cash and then the debt is also substantially cheaper than the perpetual bond coupon. On the next page, you can see, we have also executed some hedging trades in order to protect us from U.S. dollar fluctuations, which I think was really good because the last couple of weeks, the U.S. dollar has become a lot stronger. So if it would not have hedged, this could have led to a MYR 40 million cash outflow for us, but we have hedged our exposure in U.S. dollars, so will have roughly a bit shy of MYR 20 million cash and capital gain out of this transaction. On the next page, you can see the effect also of IAS 29 on our capital efficiency ratios. The reported return on equity is 8.8%. Before MFRS, it would have been a little bit higher, 9%. And you see also on ROCE, this drops down. The impact here is, of course, because of the increased depreciation and amortization, the EBIT number that is used for the ROCE calculation is somewhat lower. Very strong capital efficiency ratios, and I think we are well on track with our return on equity journey. And with that, I'll pass back to Kelvin.

Thanks, Joerg. So here on Slide 19, you can see the overall theme being that we have continued to improve our inpatient admissions generally in all markets. In Singapore, it appears to be about the same or slightly less. That's because in Q2 '21, there was still the beds that were used for COVID-19 patients. But now, of course, that's been replaced by rise of domestic as well as foreign patients. Now the changes in different markets in terms of revenue intensity or revenue per admit, I'll explain, and slides in the different markets. But overall, basically, it speaks to the whole COVID inflection quarter that I talked about, and I explained why by each country. In Malaysia, you can see here very strong return of patients from Q1 into Q2, reaching occupancy that is the highest since COVID times. And there are hardly any COVID patients now in Malaysia. The revenue per admit appears to have shrunk. You can see here minus 7%. Then that really is because, as we had alluded to in previous quarters, what Malaysia had in the times of COVID, where it was 48%, 50% occupancy, was really because there was a high concentration of the high-intensity cases, right? They are relatively sick cases. But as patients return, then the less acute cases, including pediatric cases, for example, will come back -- has come back and thereby reducing that revenue intensity. It's not anything to be unduly worried. It's just a normalization or going back to what should be the normal trend. Next slide. Just some pictures of how Malaysia is continuing to grow. You can see here we broke ground for the new medical building in Pantai Hospital Penang. This is just one example where we're going to add bed capacity to our Malaysian operations as we now start to bring occupancies up on existing bed count. Now next, in Singapore. Same theme here. There is a clear growth in terms of bed occupancy coming into Q2 2022. Again, on the back of this COVID inflection period. A lot of that growth was driven by a return of foreign patients, particularly. In fact, foreign patients for Singapore is now back at about 17% in Q2. Still some ways from pre-COVID times, but certainly a big rebound. Now in Singapore, you can see the revenue intensity here climbing strongly. That has the effect of coming off a lower base. It's the opposite of Malaysia. It's the coming off the lower base in COVID times where we saw relatively not so sick COVID patients that came -- that are decanted from the government hospitals. So that's gone away and replaced by higher intensity cases as well as foreign patients, which have also higher revenue per admit. And that's why you see that, In this case, going back up towards what Singapore's revenue intensity should be. There is some compression in EBITDA margins or apparent compression. But again, that's simply a normalization because now we are doing the business as usual, much less PCR testing, for example, which we did a lot of in COVID-19 times. Next slide. Just pictures to share, what Singapore has been doing. Renovations and respecting the environment for our staff, taking care of staff needs as we take care of patients' needs as it's important during this times. Next. Now in our Acibadem business, there is really strong underlying performance business. Actually, operations continues to be resilient, continues to be strong. Domestic patients as well as foreign patients are strong. There's a blip -- what seems to be a blip here in terms of bed occupancy going. What seems like it's going down to 73%, that's just temporary. In that -- in Q2, there was 8 holidays in May, which meant a substantial patients didn't come for electives and doctors are also away, but that is just seasonal. I -- suffice to say that, that's come back up pretty strongly as we enter into Q3. Revenue per admit here, you can see, going up. A reflection of higher case mix as we do more medical specialization, more foreign patients, which are, of course, higher revenue intensity. And overall, despite the macro environment, managing well. Next slide. Here, you can see what I was alluding to in terms of continued growth in foreign patient revenues as well as the contribution from our European operations, which are, of course, and both of these are in euro or euro hedge currencies, which then gives us a natural hedge against lira depreciation. Next, so occupancy is really high in Acibadem. We find the need to expand. You see us opening a new hospital in Atasehir. You also see us here, we are happy and proud of this acquisition of Orthopedia Hospital, which is really a perfect complement just across the street literally right in line with our cluster strategy, across the street from Acibadem Adana Hospital, which is already full. Okay. In India, the theme is the same in this COVID inflection quarter. COVID services has fallen off significantly. Patients are returning strongly. In fact, in India, the non-COVID patients has actually gone above pre-COVID times, and you see that reflected here. The revenue per admit that looks like it's gone down, it's really because you will recall Q2 '21 was one of the darkest times in health care in India. There was the delta wave, killed almost 250,000 people. At that time, our hospitals were quite swamped actually with very sick COVID-19 patients, including COVID-19 ICU patients, which meant that, that created a high base of revenue intensity at that time, and I guess this just reflects that normalization. Next. Okay, just some snipers again of our growth and our continued drive to deepen clinical capabilities. In Hong Kong, despite implementing a COVID 0 -- somewhat of a COVID 0 strategy, foreign -- and the border still very much restricted during Q2, there was growth. EBITDA is positive. You can see bed occupancy starting to climb from the Q1 low. Q1 was where we saw relatively strict COVID controls. And of course, then the patients -- the elective patients tended to stay away, but I can see that now starting to grow. And of course, against prior year, strong growth on revenue and EBITDA. We are continuing to open more beds in Hong Kong as this happens because now we find that the growth is starting to hit the ceiling of what we are able to deliver on existing beds. So that's a good problem to have, opening more beds right now. Next slide. Okay. In our segment reporting for the laboratories, there is what seems to be a lower revenue and earnings coming off a super high Q2, Q3 '21, where there was lots of COVID-19 testing in all our markets, PCR testing. So that's, of course, expectedly has come off. But if you compare that with Q2 '19, you can see that actually, on the business as usual or non-COVID business, that has seen strong growth in revenues. One thing to note is that even as the COVID-19 services start to fall off, you can see that the outreach component of our business is still at 65%. Outreach means the business that our laboratory serves or the customers that our laboratories serves outside of IHH hospitals, which is now actually larger than the 35% that they serve within IHH. Next slide. So going forward, again, Q2 was our COVID inflection quarter, but we are pleased that the efforts that we have put in place over the last 2 years have stood us well. Patients are returning strongly, domestic as well as foreign patients, and that's why giving us that strong outcome through this inflection. There will be some short-term headwinds. I think we are all aware of global inflationary trends. We have to deal with that. There is pressures on staff costs. There's pressures on utilities costs and other costs. But overall, I think there are ways by which we will mitigate that. We may need to look at appropriate price adjustments during this high inflation times. And overall, we remain focused on the strategy that we have talked about, our growth strategy organically, delivering synergies of accelerated path for growth forward via acquisitions and, importantly, staying the cost to deliver care for good. Thank you very much.

So thank you, Dr. Loh, Joerg and Evren. So before we start, we'll first take questions from the participants on the call before moving to the questions from the webcast participants. So I would like to ask and request for each participant to keep to 3 questions, and then you may rejoin the queue thereafter. So with that, operator, you can proceed with the Q&A. Thank you.

[Operator Instructions] Our first question is from the line of Rachel Tan of DBS.

And just a few questions from me. Maybe I'll start off with the medical tourism. And I think it's recovering [indiscernible] just wondering how is the pipeline like for the medical tourism. And do you expect any drop-off since there's a strong Singapore dollar now? Or how soon you can get [ equity ]?

Thanks, Rachel. Good to hear from you as always. I think the quick answer to that is, no, we don't expect to see a drop-off. In fact, I expect to see continued growth in our various markets. We're not even reaching the full potential yet of our medical tourism. So we expect that to continue to grow, actually. Singapore, as I said, is only still at 17%. We see that continuing to develop and grow. Malaysia now is probably at 1.5% of foreign patients flying in. Turkey now we're doing 23%. And yes, there's room to grow.

Got it. Just maybe just a follow-up on medical tourism. The first half of medical tourism that you see, are they high intensity kind of cases? Or is it just normal -- back to normal medical treatments?

Well, medical travel in most countries always tends to be high intensity in any case. So the answer is yes. They are contributing to -- as they return, they will contribute to increasing revenue intensity in our respective markets. Is it more intense or more acute than it was before? I'm not so sure. But it will stay on an elevated -- that same elevated intensity that we have always seen it to be.

Okay. Got it. My second question is on EBITDA margins. You noted that Acibadem [indiscernible] Europe and also your laboratories seem to have a slight drop in EBITDA margins. Just wondering is this a one-off? What could potentially be the one-off? Or is it cost due to inflationary pressure?

Let me just generally answer that, and then I'll ask Evren to chime in on the Turkey operations. Overall, it's part of this whole inflection situation that we are going through, right? So if I take laboratory, for example, you must remember that during COVID-19 times, we had a really large boost in revenues, right? In some markets, order of magnitude of 100% boost in revenues. We had to change operations dramatically to cater to that. There were costs associated with that. Now as that falls off very rapidly -- fell off very rapidly in Q2, of course, then we have to take some time to readjust operations, while we are still starting only to recover back fully the -- and not yet fully the business as usual, right? So you'll see that transitory effect of lower EBITDA as COVID-19 services fall off dramatically for lab and the rest of business has not yet fully come back. Of course, we will make all these adjustments going forward. We do expect EBITDA margins to climb back up, not to the kind of levels that we've seen at the height of COVID, but certainly back to the levels -- at least back to levels in pre-COVID going forward. Evren, do you want to comment on the Turkish side of it?

Rachel, maybe I'll help you break it down to different components, and I'll start from the revenues. If you look at the revenues in Turkey, volume-wise, as you see in the stats, we have no impact at all. I mean volumes are very healthy. It's going up. And with regards to the intensity, as you know, because of the inflationary situation in Turkey, we were able to push through the price increase at the beginning of the year, which was valid from January 2022. What is important to note over here with regards to the dynamics and patient profile of Acibadem in Turkey, we cater to a specific segment, which is relatively less price elastic than our competitors or other private players in the market. Because we cater to the A+ segment, those people, the demand coming from that segment is not affected because of the inflationary period. So that's why you see, in terms of revenue, we have no issue at all. So come to the cost side. Of course, you look at composition of our costs, as you know, for the doctor costs, they work on a revenue share arrangement. So as our revenues move, accordingly, the cost profile of their doctors cost also moves accordingly. So we also don't see any impact from the rising inflation over that because it's somewhat reflected in our revenues. And then you have the other portion, which is the staff cost and everything, of course, adjusted based on the inflation period. We also provided a salary increase at the beginning of the year, but our price increase that we pushed through, which didn't get affected, from a demand point of view, was able to cover that rising costs with regards to personnel. So roughly, that's how we had. Of course, with the COVID situation obviously coming down, that impacted our margins. But if you ask me right now what we are operating at is the normal level of margins that we're supposed to have in Turkey, which we will be able to sustain going forward. Thank you.

Okay. Maybe just to follow up on this. If I'm not wrong, I think margins dropped from 25% down to below 20% for Turkey. So that's why I thought I should highlight that a bit due to inflationary pressures. And when you mentioned price increase, how much [indiscernible] the price increase gives me? How strong inflation is in Turkey?

At the beginning of the year, in January, we did a blended price increase of 39%. And then also in line with that, we did a salary increase right around that figure. So -- but as I mentioned, on top of it, in certain areas, particularly in our Europe operations, for example, there were certain countries which had a significant decline in terms of COVID revenue. That also happened in Turkey, which kind of contributed to our margin decline. For example, in Macedonia, 25% of the revenue in 2021 second quarter was coming from COVID services, which that effect was almost completely wiped out because there was a very sudden and quick reduction in terms of COVID services.

Okay. Got it. Just one last question from me. I think Gleneagles Hong Kong is picking up very well. So I'm just wondering if you have some metrics, how -- when we will see a normalized EBITDA margin for Gleneagles Hong Kong? For example, like how much operating base or what kind of occupancy we see with that kind of number of it?

Well, always hard to give a guidance on time. But I think suffice to say that from here on, every revenue growth, bulk of that will go straight to EBITDA, right? Probably order of magnitude, say, 60% to 70% will go down to EBITDA because as you can imagine, the overheads are largely built in. We might have to open some additional wards -- may open additional wards. We need nurses. But other than that, the rest of the entire infrastructure cost is there. So how fast would it climb? I think it really depends on how fast Hong Kong reopens. What I can tell you is that the hospital has built now a strong reputation, built strong trust in the community, has many doctors now, especially is now bringing the patients there. It's become a reasonably strong nonbrand in Hong Kong, well-regarded brand. So I guess we just [indiscernible] how fast the country can reopen. You can see that reflecting to the whole Q4, Q1 and Q2 charts here.

Next question comes from the line of Divya Gangahar from Morgan Stanley.

I had 3 questions. The first question I had was just on Singapore. The Singapore inpatient admissions are still about 20% lower versus what they were pre-COVID. I guess some of this can be explained by foreign patients, but are you also seeing a gap for domestic patients as well? And when do you really expect foreign patients in Singapore to normalize back to that 25% levels? Can that happen in the second half of this year?

This is nothing we can say for sure, but I think that's possible. It's growing, it's continuing to grow. The trajectory of growth that we are seeing from Q1, Q2 certainly hasn't stopped. Country is now reopen. Hopefully, the announcements that there will be no need for mask wearing for almost most parts anywhere in Singapore come 29 of August will push that confidence as well.

Right. And any comments on the domestic patients, like overall inpatient admissions being 20% lower? Is there a gap on domestic patient side as well as what do you think fills that?

Thanks, Divya. There seem to be some caution still in the domestic market. It hasn't come back to pre-COVID-19 times. There is progressive growth. I guess we just have to await that progressive recovery in the next 2 quarters.

Got it. My second question is just on price hikes taken in key markets like Singapore and Malaysia. Also I was keen to know what competitors are doing? And what would your margin outlook for second half for Singapore and Malaysia be, assuming an inflation persists? Are we taking price hikes? Have competitors already moved? If you can give some color on that for Singapore and Malaysia?

I think we will study all factors diligently. Where we need to make appropriate price adjustments because of inflation, we will, while still making sure that the value we deliver to our patients for the quality that we give remain intact. But yes, I think given this environment, we have to review that across all markets. I think what Evren probably hasn't said is that same thing, even for -- in Turkey, I think, certainly, while we have passed through a significant portion beginning of the year, I think that we have to review that also as we get into second half.

Yes. I think it's important to know that...

Can I get year-to-date, like what's the price hike?

We can't tell you outright what prices we're going to do. We're still studying that. But I think much of the factors of inflation, I think we can mitigate through both appropriate price adjustments as well as continued volume growth.

I think if I may add here, the intention of this price discussion is really very connected to inflation. Inflation is real. We see this now on utility bill at home. We see this in labor costs. And I think the intention here is absolutely not to improve our EBITDA margins or take a cut out of the patients. On the contrary, I think we're trying to be very responsible in looking at line by line where is cost really going up. And in those areas, we take very select measures to adjust inflation in our pricing. But the objective here is really to balance inflation in our opinion.

Got it. And just my last question is to the extent that you can comment on the current progress on the Ramsay Sime Darby acquisition. I believe there was some due diligence going on in July, but just 2 questions. Firstly, where we are in that process? And any indicative timelines? And second is, given the rising interest rate environment and inflation, is that something that could be reconsidered both in terms of the direction of this acquisition as well as the price that was previously decided on?

Done our due diligence, we're in active discussions now. I think we don't have anything to announce as yet. We'll take all factors to consider. But I think as we have discussed before, we do see this as a strategically complementary asset, right in line with our cluster strategy as well as gives us a market entry into a market that we are keen on that is Indonesia.

Right. And is there some flexibility on revisiting also what the amount that can be paid for this?

I don't think that's information we can discuss right now. And again, we are in active discussions with the vendor.

Let's see when we get there.

[Operator Instructions]

While we're waiting for the callers to ask the questions, I think I will address some of the questions that we have on the webcast. So we have the first one from [indiscernible]. With dissipating COVID services, IHH revenue can still be higher than 2019 level. Is it due mainly to higher revenue per inpatient admission and any other reason?

Okay. If I understand the question correctly, can IHH revenue still be higher than 2019 despite COVID falling off? And is it simply due to higher revenue per inpatient admission? There are 2 factors, right, in revenue. One is volume and the other is indeed revenue per emission. Compared to 2019 levels, we are getting to a point where our -- overall, our non-COVID services are actually at volumes that are by and large at -- in our markets at 2019 levels or even exceeding. In other words, there is volume growth. Secondly, is there higher revenue intensity? Yes, because there is always -- we deepen our clinical capabilities in all the markets, and we do get higher case mix, which means higher revenue intensity as well. So yes, both factors contribute, it's not just revenue intensity.

So we can see that revenue per inpatient for Malaysia is declining since 4Q 2021. Do you see the momentum getting faster?

No, I do not. You remember that Malaysia's revenue intensity was really high at the height of COVID because you can always think about it as a concentration of acute patients, right? And that's why revenue intensity was high. It's now starting to come to levels that are -- which are considered normal. So the momentum will not get faster. It will get slower, and we'll probably start to normalize at pre-COVID levels.

And the last question from [indiscernible] is why Singapore revenue -- average revenue per inpatient going so strong over the quarters? Is it sustainable?

So I've explained that earlier. Big part of that is the strong return of foreign patients. There's no surprise. In Singapore, it's kind of opposite of what happened in Malaysia. The revenue intensity was somewhat depressed in COVID times, and now it's coming back up to what it should be with the strong return of foreign patients. And yes, it is sustainable.

We'll move on to questions from [ Sean ]. So the first one is, can you share the current situation on staff turnover in Acibadem operations given the changes in macro environment?

Evren?

Nothing we haven't expected. Our staff turnover ratios are within the expectations, as I mentioned, because there are 2 reasons, underlying reasons for that. One, the salary increase that we made at the beginning of the year, and we constantly monitor the situation, depending on the moments in the market and also the macroeconomic factors. So that's number one. But number two, having a very strong brand in the health care sector in Turkey, that also helped out to maintain the talent within the company. So to answer your question, we are not impacted at all with regards to the staff turnover.

Thanks, Evren. And you mentioned that margins for Turkey and Europe operations to be sustainable from here on. But has that factored in some of the rapid rise in utility bills?

Yes. When I said from here on because we already experienced that increase in the utility bills. If you look at what's happening in Turkey with the rest of the world, obviously, the energy bill -- energy expense almost doubled; in certain parts of Europe, close to triple, but we were able to mitigate that impact by increasing our intensity, like I said, passing through the additional cost to our patients. So because we have seen that impact already, I would expect the margins to be stable going forward.

And given the impact of Turkey right now, are you accelerating your growth towards the Europe? And can you share your potential budget on this?

I think one of the strategy, as Dr. Loh mentioned in his presentation, one of our goals is to diversify our revenue base. And when you look at the graph on Page 25, you see a gradual increase in terms of non-lira revenues, and a big portion of it is coming from our European business. It went up from 22% contribution in 2018, now we reached to 32%. So as we make these good investments in Europe accretive, not only greenfield but also acquisitions, I think we will have the opportunity to grow in the region and also create value for Acibadem.

Thanks, Evren. Another question from Sue Lin. Can we understand what is the potential of medical tourism in the countries you're operating, particularly in Malaysia and Singapore? I understand that Thai hospitals have excellent medical tourism services. So where are the hospitals in Malaysia and Singapore compared to the Thai hospitals? What would be your strategy towards developing medical tourism revenues?

Thanks, Sue Lin. So the medical tourism in Malaysia and Singapore will continue to grow. In Singapore, we have not come back to its full potential. And I can tell you we are seeing that -- continuing to see that trajectory climb back to at least what it was of 25% of revenues. That brand of very deep clinical expertise in Singapore and entire -- and our entire medical network in Singapore is strong. It's built a reputation over decades. We continue to invest in cutting-edge capabilities and still continue to draw patients from around the whole region. So we don't see that to abate. In Malaysia, the base that we had from pre-COVID wasn't actually that big. And so actually, in Malaysia, we see the potential to tap even more in medical tourism. We have done a lot of that for our Penang Hospital, but we'll do more now also for our hospitals in Klang Valley, such as the flagships of Prince Court, Gleneagles and Pantai Hospital, Kuala Lumpur. So there is potential for growth for sure. Thai hospitals have excellent medical tourism, I believe so. But I can tell you, our Malaysia and Singapore have also very excellent medical tourism, maybe in a slightly different niche. We provide for care, which is -- and well known for care, delivering care that is complex and the type of services that are not easy to find in countries around the region, which is why they come.

Thank you, Dr. Loh. Another question from [indiscernible]. As COVID revenue totally tapers off in this quarter, are we expecting the EBITDA margins to begin to improve in the second half of 2022 with the return of patients and revenue intensity? And carrying on from that question, what are your expectation on cost inflation? And is it fair to say that without the COVID impact in second half '22, the various positive drivers should start to drive margin improvement ahead of the cost increase?

So maybe -- I think we have talked about this topic quite a lot on this call. There is cost inflation. But as myself, Joerg and Evren has alluded to, in all our different markets, there are ways for us to mitigate that. We improve our productivity. We improve volumes on top of our fixed cost, plus we pass through price increases, which helps us to get over that inflation. So these are all the drivers that helps us to stay ahead or at least keep avoid any margin compression simply because of this cost inflation. So thanks for that question.

Next question is from Nicole. Can you talk a bit of the quantum of increase in cost for some of your key markets like Singapore and Malaysia?

Joerg, do you want to give a bit of color? I think, for example, around utilities and such.

Yes. I mean, look, it's always very difficult to give you one [ pay ] number for each market and then put it in the models. If you look, for example, the utilities here in Singapore, we have substantial increases there, 50% to 60% utility increases now. Of course, at the same time, you have cost-saving measures. You put activities in place to see how can we produce our electricity bill. So overall, if you look at the blended rate in terms of cost increases, we have no single market where the inflation rate is really much above 5%, I don't think, other than Turkey. India is slightly higher than the rest. But look, most markets are really in a very manageable range. And I don't think we should be too afraid of it. As we said, we can pass on most of these to the consumer in order to stay neutral. But I think every market is different. Every line item is different. And as I said, if you look at your own electricity bill here in Singapore, you can see that some of these are quite massive.

Thanks, Joerg. Operator, can we hand back to you to take the questions from those on the call?

Certainly. We have questions from the line of Xuan Tan of Goldman Sachs.

My first question is on Turkey. Can you explain how are lira-based revenue and cost being adjusted for inflation? And is there any timing mismatch?

Evren?

Okay. Regarding price adjustment wise, typically, the price adjustments are pushed through annually, and those typically happen in January. In -- also around the same lines, we also do annual salary adjustments right around the same months. So all these adjustments to our revenue base and cost base, the big portion happens at the beginning of the year. When you do the price adjustment, obviously, for private insurance companies, we have the discretion to do the price adjustment on our cash patients, but then we follow certain benchmarks with regards to the price adjustment on private insurance, which is set by an association in Turkey.

But I think as to the question of are there timing mismatches and cost increases in time and...

To answer your question, there's no timing mismatch because, like I said, the cost and revenue adjustments happen simultaneously.

Right. But there are other costs such as utility that's adjusted at a much higher frequency, right? Is that what's contributing to lower margins?

[indiscernible] cost is one item, as I mentioned, because of the inflation impact. But let me give you another perspective. The high inflation periods also serve an opportunity for companies with strong balance sheet. That's something that Acibadem also will enjoy this. And what I mean is, because of the strong working capital, we are able to do bulk procurement, which will reduce our cost of goods sold, especially on the materials and drugs. And because we overstock the items, as the prices increase, we are able to sell it at a much higher price, so then our costs will not increase correspondingly with the inflation. So that's another area that we are very much focused on. So it's not a question only like we are able to pass through the revenue price adjustments, but there's also a lot of initiatives that is being done on the cost side. And like I said, materials, drugs, procurement is just one of them.

Got it. Does that mean going forward, we should see better margins for the Turkey and Europe business?

Margin-wise, as I mentioned, I would expect going forward to be stable. Obviously, second half with the situation -- inflationary situation in Turkey and how we're going to react, whether we will push through more price adjustments, as Joerg and Kelvin mentioned, how that's going to impact the salary situation. I mean we will try to make it as simultaneously as in the previous question. We don't lead to a mismatch in terms of -- which will have a compression impact on our margins.

Got it. And just one last question on ROE.

Let me jump in here for a second. I think while it's, of course, the objective to be really synchronized in these activities, in a high inflation period where you don't exactly know what is the government doing in terms of minimum wages, what are doctor associations negotiating and discussing with the Ministry of Health, I think while you try to be aligned, I think we do need to accept that there is some choppiness. Of course, we try to minimize this. But I think realistically, there can be some level of choppiness in terms of the alignment between price adjustment and cost increase.

Got it. And just one last question on ROE. It has held up pretty well despite COVID drop-off. Is there any change to midterm target? Or how are you looking at this going forward?

No, I think...

So let me...

Sorry. Kelvin, please go ahead.

Yes, I'll start. Our strategy hasn't changed, which is that we've spoken about that before. We do want to improve our return on equity. We see a continued path for that. Number one, simply by improving bed occupancies or utilizing the bed capacity that we have that gives us high ROE; driving a lot of synergy programs, operating efficiencies now for the group that gives us better ROE; being some of the financing activities they are doing that helps to improve our outflow for that, of course, improves our ROE. So our journey is intact. We talked before about projecting for a double-digit ROE in some time in the future, you can see we are not so far from that. MFRS topic, I guess there's an impact. And Joerg, do you want to add on to that?

Yes. Look, let's face it. There is headwind at the moment, right? You see the inflation, you see a lot of the things we discussed. The hyperinflation accounting is shaving off here 20 basis points from this. But I think, as Kelvin said, the underlying trend is intact. The key drivers for ROE improvement are operational efficiencies, bed occupancy rates, organic growth, organic improvement, synergies in the business, productivity in our operations. And of course, the topics we do around perpetual repayments and around our balance sheet will help us to inch closer to the double digit. I think we said that certainly not in this year and likely not next year. So probably once we look in the next 18, 24 months, I think we should be slightly closer to this. But don't forget that this is always on reported net income, and if you calculate this based on the underlying, the operational net income, I think we are somewhat lower than the 8.8% right now. But we're really happy with the trajectory.

[Operator Instructions]

So maybe while we're waiting, I really want to impress on everyone in Hong Kong as a story that we continuously see improvement in. And it's great to see how we are starting to discuss about further expansion. The 300 is inside, 300 beds. And once the market opens between China and Hong Kong, you will see massive further improvements in terms of operational performance.

Thanks, Joerg. Perhaps we take one last question before we conclude the session, and it's from Rachel on the webcast. So can I ask about China losses? What is your outlook on China? And given that COVID situation is improving in China, would you expect gestation losses may reduce in the second half of this 2022? Is Shanghai Hospital still on track to open at the end of the year?

Thanks for that, Rachel. So overall, the answer is yes. The COVID situation is improving in the sense that, I guess, it's been a really long time in this COVID Zero situation. So we do see progressive coming back of patients, there is progressive improvement. For example, in our not so long ago opened hospital in Chengdu, clinics is a bit choppy, but it depends on whether there is any lockdown in one locality, right? Because every time we get a lockdown, then the clinic is to close. But if you're barring all that, then we assume that indeed, there should be less of this surprise lockdowns, then there's progressive improvement. The losses continue to reduce. I mean when we opened the Parkway Shanghai Hospital subsequently, I guess that, of course, it's a big greenfield hospital, we do expect new losses, which we budgeted for. Is it on track to open by end of the year? Actually, maybe, we should have shown this very nice photos now of the basically almost completed hospital, but there are some to get through some licensing requirements. And again, the pace of that really depends on whether there are this on/off lockdown situations. If there are, it might have to extend beyond that.

Okay. I think we have -- I'll probably take on one last question. I think, [ Sean ], we've -- I think in regards to your question on China, I think Dr. Loh has just mentioned. And any updates on the Supreme Court case?

Not yet. We are waiting for it. And as we have said before, maybe we are hopeful. We have faith in the Indian judicial system. And hopefully, that is not far away.

We've updated all our documents and we are ready to be on the road.

And now that -- I think there are no further questions, and we will now conclude IHH Healthcare second quarter and first half financial results briefing. Thank you for joining us today. And if you have any questions, please feel free to contact us at [email protected]. So with that, I'll conclude the call. Operator, you may disconnect.

Thank you. And that does conclude today's conference call. You may now disconnect your lines.

Thank you, everyone.