IHH Healthcare Berhad (IHH) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon and welcome to the Third Quarter and 9 Months 2022 Financial Results of IHH Healthcare Analyst Briefing Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 30th of November, 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 today. I'm Penelope Koh from IHH Investor Relations. Welcome to joining us for our quarter 3 results briefing whereby we're doing it via a live video broadcast available on our webcast. With me today are Dr. Kelvin Loh, our Managing Director and CEO; and Mr. Joerg Ayrle, our Group CFO. The results materials are 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 third quarter and then we will have Joerg share more on our financial performance and then thereafter, Dr. Loh will continue with the operational highlights before wrapping up the session. And shortly thereafter, we'll move to Q&A. And so with that, I'll turn over the call to Dr. Loh. Dr. Loh, please.

Good afternoon, everyone, and thank you so much for joining us at this Q3 analyst briefing of 2022. On Slide 4, just a quick snapshot of our current operational highlights in Q3. And moving to Slide 5, you see that our financials -- you see here our financials for Q3 2022. I'm pleased that as we enter the post-COVID phase, you'll remember that in Q2 I called that our COVID inflection quarter, so now we go into our post-COVID phase in full in Q3. Here our core operating performance has improved. Like-for-like net operating income improved 6% and revenue was up 4% as we pivoted well out of the pandemic. Our headline profit decreased by 54%. Now this is due to a high base in Q3 2021 that saw a recognition of higher deferred tax assets of MYR 248 million. This was coupled with higher depreciation and amortization due to the MFRS 129 related adjustments and foreign exchange losses in Q3 2022. And Joerg will take you through those numbers in more detail shortly. If you turn with me now to Slide 6, you'll see the performance by IHH since 2020. This clearly shows the steady core performance I mentioned on the previous slide. If you follow the pink line, which represents our net operating income margins, you can see that it has held steady since the latter half of 2020. Now I'll pass the call to Joerg to walk through the financial highlights.

Thanks a lot, Kelvin. I guess a lot has happened in our books in Q3. I think you saw some announcement, we want to talk it about a little bit later, on China. But look, let me get started. Revenue growth 3% year-over-year. More local and foreign patients returned and we have shown sequential improvement quarter-over-quarter and year-over-year over the last 2 years. So we see despite COVID a trough in many other markets. For IHH we have not seen any of these revenue reductions. On the contrary, we are now much, much stronger than pre-COVID. Revenues far exceed 2019 revenue and earnings levels and I think this is always the reference point that we try to do. EBITDA has decreased 9%, a somewhat very high base in Q3 2021. We saw of course a little bit of a COVID melt away from labs and our Singapore Border Control and Vaccination Programs. We also had last year valuation gains on our real estate property of MYR 65 million that was not revalued this year and we have a weaker lira. So the great contributions from Turkey and Europe have come in a little bit weaker and we also see a little bit of a desynchronization on price adjustments in Turkey. But I think the major message if we're looking to Turkey and I'm sure Kelvin is going to talk about that later, if we look at the Atasehir Hospital ramp-up, we are now just a couple of weeks into the ramp-up. We are clearly in a strong EBITDA position and the business is emerging into already run rate cash break-even situation. Net operating income decreased 11% to MYR 315 million basically on the back of a lower EBITDA. We have higher financing costs, I think that's the reality, and higher depreciation from MFRS 129 related adjustments. I think we guided to that MYR 50 million, MYR 60 million in higher quarterly depreciation. If you strip out all of that and come back to an underlying pre-MFRS 129 operating income, we actually improved our operating results by 6%. A very strong performance in our entities in Malaysia, also India is doing really well, Singapore is holding up very strongly. So we're actually quite satisfied with the underlying performance once you strip out these overlays primarily from MFRS 129. Now of course this drop in net income of 54% reported looks like really scary. But I think when you look back at last year and we have a page later to explain this, we had a MYR 251 million extraordinary deferred tax asset gain recorded in Q3 2021. Of course we don't have that deferred tax asset booked every year so that gain is no longer happening this year so there is automatically a drop in the reported income. And then on top of that, we have some of these MFRS 129 related adjustments and effects. We'll show that in a minute. Return on equity is 7.5%. We have repaid the perpetual bond. That has reduced quite substantially our idle cash balance. We have a net gearing now of 0.27x and I think this is all part of our strategy to increase leverage gradually through measures like the repayment of the perpetual bond. The net gain for us is a cash gain because interest rates of course are much lower -- have been much lower than the coupon on the perpetual bond. If we go to the next page, Page 6, we've prepared this to explain a little bit the movement. So we started a year ago with MYR 550 million in net income in Q3 '21. We then have a little bit of a drop in EBITDA. Part of this has been explained through the MYR 64 million in real estate revaluations. So the majority of this is actually also not related to underlying performance effects. We then have an increase in net finance cost. This is basically moving from a perpetual bond into real debt and we have some interest increases through these inflationary and higher interest rate environment. And then you see a couple of steps for improvement, which is great, right. We have some positive FX gains that we have from the cross-currency hedges that we have in Turkey. We have FX gains from having successfully hedged our repayment of perpetual bond where we hedged Singapore dollar against U.S. dollar and had quite a nice gain on that. We have then a reduction in minority, in interests adjustment and we have paid a little bit less tax. And then comes this major drop-down MYR 259 million. That is this drop-off primarily of this deferred tax asset that we no longer have in our books. Then we have some net FX losses, we have a positive effect on an impairment that we did and we have some other extraordinary items. So that leaves us at a PATMI ex-MFRS 129 of MYR 338 million. So you see if you look at this journey, the major drop is actually caused by this one-time item that we had last year and if you eliminate that, we are basically increasing our underlying net income. And then you have 3 effects out of the MFRS 129; increased depreciation, there is also a base effect on this revaluation of extraordinary items and a base effect on the elimination of minority interests. All that are purely accounting and non-cash effects and that leads us to MYR 252 million. So I think we recommend all the analysts to look at this analytical journey a little bit more carefully. Underlying earnings and I think this has been -- we then move to the next page where you see under net operating income, we had a net operating income pre-MFRS 129 of MYR 355 million. This has increased to MYR 374 million, that's I think a 6% increase. And that is a little bit how we look at our business to really focus back on operations and look at number one, quite a nice growth on the revenue; number 2, underlying net operating income is improving by 6%. But of course we understand we need to look at the respective overlays and the MFRS 129 effects. Quick glance at the group occupancy rates. We've improved to 70% bed occupancy rates so I think we are on track with what we've promised to get back on this glide path towards higher capital efficiency. Admits are now at nearly 220,000 for the group. On the next page, don't need to go through that in detail. I think there were questions to give a little bit more transparency around how did the group numbers actually stack up from our bottom-up countries. We see very strong development in Malaysia. Singapore is still dealing with this on the one hand inflationary trend, but on the other hand a real constraint on labor. We do have beds that are currently not opened because we just simply cannot get enough nurses in order to really grow the operations. And then Turkey and Europe, we see a drop in EBITDA and that is what I mentioned before, a little bit asynchronous movement between inflation and price adjustments. We have pushed out prices quite aggressively, but then of course we need to look at the quarterly sequential development. On top of this, we see of course an impact here out of Atasehir. We have all the ramp-up costs of that new hospital in our books in Q3. And in Q3 I think we've achieved 3% or 4% EBITDA in that hospital in a couple of weeks only, but all the pre-opening cost that had to be recorded are of course in our EBITDA numbers and that leads to this effect. All other markets very strong EBITDA growth. If you look at the revenue development on the next page; still 25% EBITDA comes from Malaysia really doing very well, 37% Singapore, 18% India. India is starting to really contribute more and more to our EBITDA development. And then 23% out of the Turkish and European perimeter. Now let's quickly go into MFRS 129. We had guided to this page I think last time. We have 5 effects. One, balance sheet re-indexing. We have year-to-date balance sheet re-indexed MYR 2.8 billion. In Q3 it was actually not as much of a difference. We have re-indexed our P&L that led to a MYR 21 million negative adjustment in terms of our EBITDA. Main effect is from choosing different FX rates in MFRS 129. We need to use quarter-end FX rates while for MFRS 129 we use average exchange rates for the quarter. We then have an increase in depreciation and amortization that is the MYR 50 million that I keep talking on about and that's basically staying in our P&L. I think that's not what we can get away from. Hardly any monetary gains or losses and there is no impairment planned. If we move to the debt development, we have an increase -- a strong increase on our EBITDA and this is from 1st of January to Q3. We have strong EBITDA, we have capital expenditure, Atasehir went online, we had some acquisitions in Japan under PLife REIT, we paid taxes, we paid strong dividends and that's where we end up with our net debt position. If you look at capital efficiency ratios, of course this is all based on reported EBIT or net income number so it's not a surprise. We have a little bit of a drop in return on equity. ROCE before MFRS 129 is actually staying on the same level and that gives you already an indication that the underlying business is continuing to do really well. Net debt to equity by design increased because we repaid our perpetual and that reduced the equity base and increased the debt base. And with that, I'll pass back to Kelvin to talk about the operational highlights.

Thanks, Joerg. So on Slide 17, you can see here our inpatient admission figures. The movement from Q3 '21 to Q3 '22 in terms of volumes in the different countries really is still the effect of whether those countries had significant COVID volumes or not before. You can see here Malaysia growth is strong because they didn't have COVID patients. Singapore more flattish because there was an exchange of those COVID patients into now non-COVID patients. And the other markets similarly fairly stable as well. In Turkey and in India, that exchange out of COVID patients to now fully non-COVID patients. The revenue intensity changes are similarly a reflection of that pattern. In Malaysia, you can see here the recovery of the less acute patients has brought down the revenue intensity. In Singapore, the converse because there were the less ill COVID patients last year converting now to higher case mix activity as well as foreign patients in Singapore hence revenue intensity increasing. In Turkey, the revenue intensity is of course a significant part is price adjustments following the high inflation economy. I'll move on to the next slide. In Slide 18 here the strong recovery of inpatient volumes in Malaysia can clearly be seen for the reason that I had stated. We are very pleased with how Malaysia has been growing strength to strength since COVID reopening. So revenue increased by 18% over the same quarter last year and EBITDA grew by 24% to MYR 248 million. EBITDA margins are now close to 30%. Moving to Slide 20. Here for Singapore, revenue decreased 3% to MYR 1.3 billion. Again this is because of less significant COVID-19 melt offs both inpatient as well as less compared to a year-ago, but that's offset by the recovery of both domestic and foreign patients. Foreign patients now make up 17% of the entire IHH Singapore revenue and almost 25% of the Singapore Hospital revenues. EBITDA also grew 3% to MYR 375 million and the margin Q3 is at 29% EBITDA margin. Now you can see here the recovery post COVID is not as strong as compared to Malaysia. One of the reasons for that really is the staffing constraint. We are actively hiring nurses, but there is a lag in Singapore so there is a relative supply constraint otherwise the volume rebound on group would have been stronger. Going on then to Slide 22 for Turkey and European operations. Revenue increased 1%, EBITDA dropped 23%. There were translation effects here and there was the start-up cost of Acibadem Atasehir Hospital, that new greenfield hospital in September, and of course higher energy costs as well. Revenue intensity is high as I've explained because of the necessary price adjustments. In Slide 23 you can see non-lira contributions now make up 46% of Acibadem's revenue, of which 15% came from foreign medical travelers to Turkey and 31% came from European operations. You can turn now to Slide 26 for India. There is healthy recovery of inpatient admissions across our India operations, including both for Fortis and Global Hospitals. So as a result, revenue increased 6% and EBITDA had some slight decrease really mainly due to the inflation effects. Number of foreign patients also is gradually increasing, in fact by and large it's come back to where it was pre-COVID. And average occupancy now is really strong standing at 75%. Moving to Slide 27 for our Hong Kong operations. We are pleased that Gleneagles Hong Kong is maintaining its positive growth momentum. Revenue increased 19% and we also saw the sustained positive EBITDA for the quarter. Average occupancy is now 64% after acquiring 30 beds that are now operating compared to the 198 beds in Q3 '21. We expect to continue to open more beds. As we move towards end of the year and early next year, we do expect sustained positive growth for GHK's EBITDA. And now lab business on Slide 29. For Q3 '22 our revenues for this segment were MYR 401 million and EBITDA was at MYR 86 million. And although revenue declined 31%, this is really off a very large base due to COVID-19 for the previous year. So that's encouraging. We are happy to see now that business as usual, our non-COVID revenues is growing 8% year-on-year and you can see here now are starting to compensate for that melt off in COVID services. So as I close with Slide 32 on our outlook. We do expect the inpatient volumes and bed occupancy to continue to grow in this post COVID phase for IHH. The health care industry does face some near-term headwinds that are inflationary pressures especially salary costs, nursing shortages that is causing some constraints particularly on supply particularly in Singapore. Other inflationary pressures include energy prices and of course interest rates are also rising. I want to call out to China. We do expect operating challenges in China and this is the reason why we have signed an agreement to divest our effective stake in Gleneagles Chengdu Hospital last week. As we move forward, we will and we do continue to review our China portfolio with the aim to minimize ongoing losses. Now our long-term growth trajectory remains intact. Our financial position is strong. Our cash generation continues to be strong. We will focus on our public strategy. We will focus on our growth via our cluster strategy that we mentioned, continuing that growth trajectory while driving up our return on equity. And we'll grow both our Hospital segment and our Laboratory segment as well. So we are confident to ride out these short-term challenges and we are confident that we'll deliver long-term growth of our hospitals. With that, thank you so much and we'll now take your questions. Penny, please.

So before we start, we'll first take questions from the participants on the call before moving to the questions from the webcast participants. I would like to request each participant to keep to 3 questions and then thereafter you may rejoin the queue after. With that, operator, please proceed with the Q&A. Thank you.

[Operator Instructions] We have the first questions from the line of Nicole Goh from UBS.

Just wanted to find out about the -- I think earlier this year I think you kind of guided that with the cost increases in both Singapore and Turkey, there were going to be some price adjustments that will be made. So if you can help us understand how much price increases have been done and how much more to go for both Singapore and Turkey? That's my first question.

So Singapore took the price increases at the beginning of the year and that has probably some lag to the inflation if you go look towards doing something as we enter into the new year. Turkey also I think the same effect. We have put through an order of magnitude 5% price increase beginning of the year. We did so another round in the second half, but each round I think there was indeed some lag compared to that high inflation situation. And we look forward to doing another round again at beginning of the new year.

So just to clarify so in Singapore, there was only 1 one-time, right, this year, that's why you're saying at the beginning of the year?

There is the 1 major one at the beginning of the year. There are smaller ones. We do make price adjustments along the way. But I think it's fair to say that it's probably just about in line or slightly behind inflation as it turned out for the year.

Okay. And would you be able to share like the rough magnitude in Singapore?

I think the percentages, inflation in Singapore we are talking single digits. This is not a double-digit price adjustment. So this is roughly pari passu with inflation as I said.

And I think it's a bit too simplified to think that on thousands of line items, you would then apply 1 multiplier and then that's the new price. I think it's really a lot more a mixture of many activities. We still need to look at competition, we need to look at benchmarks. There are some areas that are sensitive. We also don't want to overburden patients. It's more like a blended approach and, as Kelvin said, the intention is to offset inflationary trends.

Sure. My second question is with regards to the bed closure because I think, Joerg, you mentioned just now that because of the labor shortage, you were not able to open all the beds in Singapore. So what proportion of your beds are currently closed still in Singapore and any sort of timelines that we can look to for it to open?

So Nicole, there is a constraint. We estimate that if not for that constraint, possibly another 10% of volumes could come through quite easily. By next year we do aim to solve for this issue. With regards the constraint, I think over the next 6 months we should look towards resolving this. We view that staffing constraint does not become -- does not constrain our ability to service patients.

Okay. Got it. And sorry, 1 last question with regards to Singapore again. I think you mentioned just now that foreign patients is 17% of the entire IHH Singapore revenue and 25% of Singapore Hospital revenue. Could you remind us again what was it pre-COVID? Was it 25% of Hospital revenue so we're back to pre-COVID levels already?

It's back to pre-COVID percentages. So the volumes have not over the -- fully back to where it was.

Okay. So in terms of percentages, revenue is back to pre-COVID levels?

Yes, that's correct.

[Operator Instructions] Our next question comes from Rachel Tan of DBS.

So my first question is to follow-up on Singapore. I understand that there are inflationary pressures and also labor shortages. Just wondering in terms of margins wise, if you factor in potential price adjustments next year and you'll probably get labor shortage back again, would you be able to bring your margin for Singapore back to above 30%? And likewise for Turkey with the hyper-inflation, do you think that you can also bring the margins back to where it was before?

We do expect to improve things from here. Like we said, there are still some headwinds so I think let's not get ahead of ourselves. But we do not expect those margins to slide further for Singapore. It'll be folded there with some price adjustment and some volume growth. There are still inflationary pressures, yes, maybe there's some upside. Turkey too, we are trying to catch up with the inflationary pressures through relevant price adjustments as we turn the year.

Okay. Got it. Maybe just to follow up on this. In terms the demand that you're seeing, I presume there's some like pent-up demand because of COVID and now that you have reopened. Do you expect this strong pent-up demand to be able to come through for the rest of 2023, coming year?

Yes. I'm not sure we will paint the picture as a pent-up demand. The health care effect -- I mean the reopening and the COVID situation of constraining sick patients, that has -- it's been quite a while now. So I wouldn't go as far as to say there's pent-up demand. I'll just say as continued recovery as patients get confident, softer elective -- smaller electives, less sick patients also come to hospital because they don't defer those. So it's not pent-up in the sense that there is a sudden release and then it falls off. We do expect that there is continued growth post COVID, number one. And number 2, continuing growth simply because of our strong brands and the whole rising of the demand.

And I think if you look into '23, I think we also made quite clear that 1 of the growth drivers is of course opening of new beds. So it's really in our existing footprint opening of new beds in the locations we are in Malaysia, in India; is a key growth driver and remains a key growth driver. So I think going forward, we should really not underestimate the effect of expansion of capacity. Plus, as Kelvin mentioned, the additional bed openings here in Singapore with increasing labor supplies will continue to drive growth.

Okay. So we do have a target in terms of how many percent of opening of beds next year?

Maybe we can paint a picture longer term. I mean in terms of literally just using existing land that we have in Malaysia [Technical Difficulty].

Maybe, Joerg, you want to take over the question and wait for Kelvin to come back.

Yes. So what we have -- I'm taking over from Kelvin here for a minute. Gleneagles Penang, Pantai Penang, Pantai Klang; if you just add this together, there are 600, 700 beds that we can open. Of course that's not all coming in, in next fiscal year, but we are working on that. If you look at Turkey, we've just acquired 52 beds in Ortopedia Hospital. We've opened Atasehir here with 280 beds. We have Kartal that we plan to open in 2023. And if you look at India in Fortis alone, we have around 1,500 beds that we plan to open in the next 3 years. So there is quite a large headroom that we have to grow in our existing footprint and you shouldn't underestimate our ability to execute potentially in a couple of smaller transactions where we look at smaller hospitals in areas where we're not in at the moment. As we've shared with you, we are back in the M&A market and we are participating, but deals need to be reasonable of course. So if you look at the growth potential from where we are now, I think there's really a lot of runway to continue the sequential growth trajectory that we have. We just came back from a great Board meeting we had with our IHH Board. We presented a very strong budget in 2023 and I do look forward with quite a lot of confidence that our top line and bottom line growth will continue.

Great. Sounds good. My next question is really on the Turkish swaps. I mean correct me if I'm wrong. But if I remember correctly when you hedged the debt -- Turkish lira debt for the Turkey operations, there were some swaps involved. I just wanted to know when are the swaps expiring and given the Turkish lira depreciation, how would that impact if once the swaps expire?

Yes. So we're doing a mark-to-market on all these swaps and the swaps are basically tied to expiration of the respective debt. We are 100% hedged except for this 1 rental contract in Maslak in Istanbul. That's a drag, we have not hedged that. All the rest is basically hedged, it's hedged to maturity. And as we go through a mark-to-market every quarter, you see these profits coming through every quarter with the respective markdowns on the liability side balancing that. So when these loans are due and we go into these hedges, you will not see any extraordinary effect on our books.

Okay. The duration of the swaps, is it 2 years, 3 years remaining?

Really they are tied to the loans. There are many different loans, I have here a list of all. There's a 7-year loan that has a hedge attached to it. There's some are 2028, some are 2025, some are due next year. So it's really a mixed bag and our hedges are tied to the loan directly.

Okay. Got it. Can I just squeeze in 1 last question just on the Chengdu divestment. Just want to try to understand would you use the same kind of divestment structure to your Shanghai Hospital given that the investments to Chengdu and also Shanghai is different. So would you consider the same kind of divestment structure?

Yes. I think let's be clear, the China operations is very challenged. You can see we have already indicated our exit from Chengdu through that transaction and yes, we are looking for options in the Shanghai side of the business as well. The aim is to absolutely reduce our losses the best we can.

One moment for the next questions. We have the next questions from Divya Gangahar from Morgan Stanley.

Just a couple of follow-ups on Singapore and Turkey. Just on Singapore, can I understand exactly how the nursing shortage is being resolved and like how do we get the confidence that we should be able to address this issue in the next 6 months?

So first off, we have accelerated the recruitment pipeline. There are several hundreds of nurses in that pipeline. It does take a while because quite some of these nurses they come in from outside of Singapore sources and of course they need to get their work passes and so on and so that may take 3 to 6 months, but there is that pipeline. Secondly, we are rapidly redesigning job scopes in a market like Singapore where we face such constraints. So for example, we are building up a pool of staff called Patient Care Associates, which then help out with the -- that reduces the nurses' tasks so that they can operate properly the license, which means that these Patient Care Associates will move tasks which are non-nurse license requiring so therefore, the nurses can really focus on acute nursing work. And of course we look for other ways to automate the processes and improve the labor demand. So we are confident we will resolve this. It is a temporal situation caused by very rapid reopening in Singapore. It's not just us in the health care sector. I think it's faced by the entire health care sector and it's faced by the entire service sector in Singapore.

Right. And roughly speaking, what kind of wage or salary hikes are you seeing compared to what it was in 2019 for the medical staff?

We will keep competitive. We are competitive. We will remain so. It is fair to say that the current wage hikes in Singapore are higher, in fact most markets are higher than what it was in 2019 given the pressures on wage inflation. But we'll do all that's necessary to [Technical Difficulty].

Right. I mean is it like 20%, 30% above 2019 levels or like just trying to get a sense on the quantum here?

Maybe a better way to think about it is that will we face a situation where the burden of manpower costs outstrip growth and pricing adjustments. I don't think it will as we get into 2023.

Okay. Fair enough. And a similar question for Turkey. Just I mean this quarter we've also seen the volumes or the inpatient admissions actually lower. I mean after 4, 5 quarters of growth, we've actually seen that decrease and the margins are also probably amongst the lowest in the last few quarters. So is there some sort of a demand slowdown as well in Turkey and that's why you're not taking price hikes in line with inflation?

So price hike, I think we have to watch that space carefully, find out really the right balance between passing on inflationary pressures and of course being cautious we provide the best value. But there is a seasonal effect in Q3, there were quite a few more days of public holidays, summer holidays compared to before and the occupancy, that plus the fact that we opened a new hospital -- obviously a greenfield hospital there. That's why you see what looks like a lower occupancy rate as well. So that new hospital opening also contributed. So some seasonal effects and some one-off effects with the hospital reopening.

Got it. And what would you reckon would be like a more sustainable margin for the Turkish business? I mean it's ranged between 20% to 28% in the last 4 quarters so it's a pretty wide range. Going into 2023, I mean do you think it's in the low 20%s or the mid 20%s? Where do you think it settles?

I think the Turkish team has seen some margin depression from last year from the high levels of 26%, 27%, 28%. I think there was expected to be somewhat of a normalization. We do have this effect of inflation and don't forget electricity prices, right. We have electricity prices that probably cost us 2%, 3% EBITDA margin. I think what is the long-term range? I think the aspiration clearly is to get back to somewhere between 24% or 25%, closer to 25%. I don't think that there is any belief that the business needs to be depressed again closer to 20%. I don't think that that's where the outlook is. I think we are in that range 24%, 25% is a safe bet.

And again remember the effect of opening a new hospital in Q3, a 280-bed hospital.

One moment for the next questions. We have the next question from the line of Amanda Foo from Credit Suisse.

So my first question is regarding Malaysia. It seems that EBITDA margin has been growing quite nicely, which is at about 29% and that's higher than pre-COVID levels. So would you mind sharing whether these levels, are they sustainable going forward and what are the key drivers behind this improvement that we've seen as well? That is my first question.

So Malaysia is doing well. Revenues and the patient volumes have been growing strongly, bed occupancy is as high as it's been, higher than it was pre-COVID. So of course the absolute throughput is helping and that's why you are seeing this higher margins. Also in Malaysia a lot of work has been done to improve the case mix. We have developed more sub-specialties, expanded the complex -- especially this more complex care like cardiology and cancer. So the case mix intensity is higher so that also contributes to the higher margins. Now as we continue that reopening, there is a counter effect of the less acute cases, right, coming back in. So there is that counter effect. But all said and done, could things remain at least this level? I absolutely think so.

And related to Malaysia, I was wondering have we seen any return of foreign patients? What's the contribution if so and is there room for that to grow beyond pre-COVID levels?

Yes. There has been strong return. It's probably not yet fully back to where it was. But we do want to grow that segment. You know that traditionally we had a strong inflow into Penang. We are on a deliberate strategy also now to grow medical tourism not just for Penang, but our tertiary, quaternary hospitals in Klang Valley such as our Prince Court, Gleneagles, Kuala Lumpur and Pantai Hospital, Kuala Lumpur.

Would you mind sharing what's the foreign patient revenue contribution for Malaysia then and maybe India since you've shared for Turkey and Singapore?

Penny, do we have that for Q3?

Yes. I think it's roughly about 4% of the Malaysian revenue currently.

Okay. And for India, where do we stand right now?

India is pretty close to pre-COVID probably in the 8% to 10% magnitude.

Okay. And moving on, obviously right now we find ourselves in a rising interest rate environment. So I was wondering how does that impact IHH. Yes, we know we have seen the conversion of perpetuals back to real debt so obviously net financing cost does go up. But does this rising interest rate environment also impact IHH's financing cost? And at the same time, is there a rough proportion of fixed versus floating debt that you can share with us?

Yes. Of course there is an impact. We have average cost of debt that is still probably around 3%, 3.5% range. You know that our debt overall is very, very low. The part where we are affected is of course through REIT on the one hand, also through the acquisitions that they did in Japan which is financed through Japanese yen and our debt is affected by shareholder loans in Hong Kong. We're trying to look into that situation. There is no question. If we look at Q1 '22 we had 2.8% cost of debt, we have now 3.3% cost of debt. So it does go up to some extent and with the interest rate environment, it will continue to go up. If you look at our cash flow and the ability that we've already demonstrated and deploy idle cash in debt reduction, we believe that this is something that can be contained, but we're not immune to a rising interest rate environment.

And if you could share the proportion of fixed versus floating?

We have today primarily floating rates across. In the long run this proves to be the more attractive funding option as we see that -- already we look today at the outlook in the next year or 2024. I think you see already the yield curve reversing back down. So our belief at this stage is that floating rates are still more attractive as they attract the lower coupon.

And 1 last question on Fortis. Could you provide us with an update on the mandatory takeover offer? Is there any timeline that you can share and could there be plans to revise the offer price?

I guess our intention is to be really respectful to local authorities in India. So we are in discussion with SEBI. I think we've disclosed some conversations and communications that we had with SEBI. There is a desire by SEBI that further clarification from the Delhi High Court is sought after. We are in the process and discussing with SEBI how to exactly do this. And putting time pressure on people in this environment is also not usually seen as being helpful. So we really want to be respectful of Delhi High Court to SEBI. We will talk to them and see how we can proceed with this. At this stage just to be clear, it's not a question of revising the price. It is a question if we can go ahead and we'll do our utmost to get this timeline clarified.

I think what's important though is that despite that MPO situation hasn't gone through, you can see the business is growing strength to strength. Revenue has grown strongly, bed occupancy is probably at all-time highs so is EBITDA margins and we expect that growth and continued productivity to actually continue.

Yes. That's precisely the case, right. So I guess the market also is curious whether is this an opportunity for IHH to increase their stake there especially for the reason that you just pointed out it's doing very well. And if you look at the original offer price versus where it's trading today, there is quite a gap. So that was just something I'm trying to find out if you could share that thought.

Our intention is that Fortis continues to grow. We would love to put more money into Fortis. There's a lot of opportunities and I'm sure we'll find ways to deliver on that while nearly tripling of bed capacity over the next 5 years.

One moment for the next questions. From the line we got Chun Oong from RHB Group.

I have 3 questions. My first question is being on your Turkish operations. I mean if we look at your Turkey EBITDA level, the margin has somewhat came down sequentially as well as on a year-on-year basis even before we take into account of our net monetary loss resulting from the MFRS 129. So could management actually share what are the key mitigation plan IHH planning to do in the coming quarters and what is your margin expectations for your Turkey operation moving forward?

So this effect they are seeing for the last maybe 2, 3 quarters in Turkey. Again remember that the Turkish operations is strong. The brand is strong. The volumes have actually been high running up to the early part of the year in Q2, then has found some seasonal effect in Q3. Secondly, the big thing that has happened over the last 1 year in Turkey is the very high inflation, right, and there is a price lag. There is a pricing lag because there isn't the ability to keep passing that price on. We do it in once-a-year cycles. There is somewhat of a controlled environment under which that can be done so we did that in the beginning of the year, we did that in the second half of the year. But it's true there was some lag. We try to catch-up on that as we go forward and we are hopeful that, that same massive inflation that be saw through the year won't happen -- won't keep happening. And secondly, as we grow volumes and we expand the business, then we should try to compensate for these effects as Turkey has always done for many years of its operations. The other piece I think that you'll be able to see, just to add on, is the foreign revenues, right. The non-lira revenues which now stands at 46%. So that is a very strong support base which does compensate for translation effects on the lira and that's still growing as well.

Okay. Can I also get a sense in terms of the nature of the net monetary loss being recorded during this quarter? I think the net monetary loss of MYR 9.8 million versus a net monetary gain of MYR 296 million reported during the previous quarter. Just want to get a sense of what is this about. And I think if we look at -- can we look from this point of view that these negative monetary loss is some kind of a reversal, which may indicate the Turkey inflation was not as high as the previous quarter?

Yes. That's an interesting one. So actually not really. I think there are 2 effects, right. One effect is you take Turkish lira and you go through your revaluations and then in Q3 alone that revaluation in Turkish lira was around if you convert it at same currency rates like MYR 10 million plus. So there was a positive effect. Now unfortunately in hyperinflation accounting, you need to take quarter-end exchange rates for your hyperinflation entries and the difference between average Q3 ex rates and quarter-end ex rates turned that gain into a loss. So the loss is actually not a loss, it's only a translation effect from Turkish lira into ringgit. It's a bit technical and looked at just as a revolving change so the monetary gain or loss was in fact a gain in Turkish books. But unfortunately because of that FX rate differential between average rate Q3 and quarter-end rate, this gain has turned into a loss in ringgit terms. I'm not sure it's clear, but that's how mathematically it works.

Very clear. I think my last question will be on what were the key steps taken by IHH to actually tap into the return of medical tourism, i.e. maybe from the point of view like maybe broadening your private channel partner as well as insurance entity or any other measures that IHH could share with us?

Yes, absolutely. So first of all, through COVID times keeping in touch with all our patients and channels and sources, that has been super important. We have done that. You can see the results of that is that every time a country reopens its borders, that rebounds super strongly. In India and Turkey, that's rebounded to its full extent. In Malaysia, I think they're getting to that. In Singapore, we actually expect that as well. We have probably order of magnitude 80% there and, as we said, there are probably some constraints on the supply side as well. Now what can we do more going forward? Yes, the traditional markets and cities that do come in the respective countries; we'll drive growth, further partnerships, expand channels. Then there are also new markets, right, second tier cities which maybe had lesser medical travel, but now it's ready for it. So we're expanding into those areas as well. And yes, I think you brought up the fact that for most of the countries that actually bring medical travel, say for example from Indonesia into Singapore and Malaysia, there are development of primary insurance schemes that actually allows patients foreign travel and that's growing very rapidly. So we'll tap into that as well. And finally of course and most importantly, we deepen our specialization, maintain the edge that we always have in our respective markets whether it is Turkey from -- medical tourists from those regions Malaysia and Singapore, medical tourists from Southeast Asia and Asian region. Deepening our clinical capabilities and maintaining the cutting edge I think is super important. In Singapore for example, we are due to open a proton beam center pretty soon certainly in that first 1, 2 months -- hopefully in the first 1 or 2 months of the new year.

Shall we quickly move to the questions on the ticker here? Wee Kuang, updated mandatory offer. I think we've answered that. We are trying to get through SEBI on how we can relaunch this. Request us to ask Delhi High Court and we're figuring out exactly who needs to ask and how does this need to be asked. Our view is of course the stay order has lifted. I think we've communicated this and we are confident that we can find a good timeline to ask how we can move forward. Then how will IHH rationalize growth moving forward? Will it be in a similar fashion as opening beds or will we have new hospitals? I don't know, maybe Kelvin, you want to look at that.

I think the question was around growth going forward. Well, how do we drive growth, new hospitals or otherwise? First of all, we still have some ways to build beds. We come off Q3 now still overall for the group probably just slightly over 60% bed occupancy. So even on existing bed capacity -- even on existing buildings, we can simply add more patients throughput. And as I mentioned, we will then add beds to our current land that we have in next 3 years; 600, 700 in Malaysia; Fortis has capacity to add another 1,000 beds. In places where we are starting to max out in clusters, we are starting the max out, then is greenfield possible? Absolutely yes. And of course greenfield meaning new hospitals that we build and of course as mentioned before, we are in a very deliberate push forward to making acquisitions that are strategic and that are accretive particularly around clusters that we are really strong in.

Maybe I can go on to the other question by Wee Kuang as well. Can we have more color on the agreement to divest Chengdu hospital? What is the timeline and who is it with?

Yes. We've of course agreed on confidentiality, I think it's a party we all know, but I think we'll disclose more once closing happens. Timeline is next couple of months we're trying for closing.

The next question by Chun Sun. I think we answered your question which you asked earlier. So we'll move on to Sean. Is there any key takeaway or outcomes from your meeting with SEBI?

Yes. The discussion is quite clear. I think people are aware of the interpretation on the Supreme Court order, but of course we also want to be compliant with the court and not be in contempt or held in contempt neither does SEBI want to be held in contempt. And I think the desire is that further clarity is sought from the courts and we are in discussion with SEBI on how to exactly get that.

Our next question is from Cox Yang. First one, can you share with us the major foreign patients country IHH Singapore is serving during pre-pandemic? Is it China? And given the declining inpatient admission in Singapore, just to confirm is it due to Chinese tourists still not being able to travel to Singapore for seeking treatment? And how is the momentum of foreign patients returning to IHH Singapore in October and November versus Q2 and Q3? Dr. Loh, you want to take that?

Great question. So first of all, that apparent reduction in emissions. I mean not so much. It looks flattish maybe from Q3 '21 to '22, but again that's because we came off a base where there was a public-private partnership in '21, right, where there was significant numbers of COVID-19 patients not so acute, but filling up beds in the Singapore hospitals. Then we come to Q3 '22 where that's basically 0 or very, very few COVID patients and that has been replaced by non-COVID patients domestic as well as foreign patients. So the foreign patients actually rebounded very strongly. As I mentioned, it's probably at least at 80% pre-COVID levels. Which countries does it come from? No, China has not been -- never been a major contributor of foreign patients. The big markets for Singapore in terms of medical travel are Indonesia, Malaysia and then the Indo China region; Vietnam, Myanmar, we go further out a bit Bangladesh and India. So that's where our markets are. We do expect it to continue to grow. We saw that very relatively quick rebound as borders reopened in Q2, continued growth into Q3. There will be continued growth, it will come back to pre-COVID levels and more and then, as I said, we have the staff supply constraint part of the equation as well.

Next question from Sean. Any particular reasons why there wasn't any pickup in Acibadem inpatient admission Q-on-Q as I would expect prior second quarter to be a slower quarter due to festive periods?

Yes. Actually there were more holidays as well in Q3. And when you look at that slide that we had around bed occupancies coming down. So firstly, because of the holidays. Secondly, because the denominator is not bigger, right, because we opened more beds as a result of the new Atasehir Hospital in Q3.

Also if I may add on to Dr. Loh's comment. I think for Q3 in particular I think when we spoke to our Turkish counterpart, there was actually a stronger impact from holidays in Q3. Actually Q3 in Turkey seasonality wise is actually people tend to go on holiday and we saw a greater impact this time around because not just the patients that are going on holiday, the doctors are also going on holiday and hence I think you saw a stronger impact in addition to the national holidays, which Dr. Loh was mentioning earlier. All right. The next question also from Sean. What is the current nurse shortage?

And don't forget that this is the first year post COVID in Europe. Europe holiday season is July, August. So yes, that really is a traffic topic, right?

Exactly. So next question, what is the current nurse shortage as a percentage of your total requirement in Singapore right now and do you foresee spillover effects to other regions such as Malaysia?

So as I had mentioned, we do know there is a supply constraint. It's very hard to estimate if we could resolve it all, what is the differential in revenues. Personally I think easily another 10% of revenues [Technical Difficulty] otherwise sort of backing up in [Technical Difficulty] in terms of the trajectory.

Okay. There was a disturbance on the line I think.

Okay. Maybe we can quickly move on to the next question from Raman. 2 questions. Can management please help to clarify why finance income for third quarter 2022 is negative MYR 68 million versus a positive of MYR 125 million in Q2 of 2022? And also what's the appropriate steady state effective rate that we should assume for the group going for 2023 and beyond?

I think in the finance income, there are a lot of different moving pieces in there. You have some of the revaluation of cross-currency swaps. You have some effects out of hedging against the U.S. dollar and others. And then once you move from hedging into redeeming, it also moves from one line to the next line. I think we can come back to you and give a little bit more flavor on what these numbers exactly have been. Usually I mean we are not in the business of investing or creating financial income. All these are purely effects out of mark-to-market topics in the hedges we have or moving them from being hedged into redemption.

And if I can add on Joerg's point. Actually Raman, you can refer to our Interim Finance Report on Page 43. We actually give you a breakdown as to why that finance income is negative so it basically mix of 2 item, which is then the interest income as well as the fair value lost on the financial instruments of which then, which Joerg was mentioning about the swaps as well as some forward contracts that we have.

Well, you could imagine that with the cross-currency swaps that we have in Turkey at the moment, these create huge liabilities for the banks. And with ongoing revaluation of the Turkish lira, these liabilities increase. So banks of course also have a quarter-end and are then sometimes a bit softer in their assumptions around forward exchange rates and that leads to some phasing elements in quarter-ends. This is not anything to be concerned of or concerned with.

And then the second question about the steady state effective tax rate that we should assume for the group for 2023 and beyond?

I don't see that there is any change from where we are at the moment. I think of course it will have some entities that move into a more profitable situation. I think you have India's profitability growing, you have a move towards EBIT positive in Hong Kong which at least we plan for in next year. But I don't think that there's going to be any structural changes.

Next question is from Shafiq. What is the explanation behind the decline in IHH India's EBITDA margin in third quarter despite the higher occupancy rate and revenue intensity? You want to take that question?

There are some inflationary pressures so I think that's part of the effect. The other thing too is that as with most markets to lower prices while costs go up on a continuous basis due to the inflation, but pricing adjustments we can't do that on the continuous basis.

But just looking at it, it's not like it's super material, right. It's like minus 1% so...

It's relatively flat.

It's actually rather flat -- flattish not really a reduction.

We'll quickly move on to the next question from Raymond. So the first one, what was the losses in full year '21 from 49% effective state in Gleneagles Chengdu Hospital and how much was the sales proceed from the 49% divestment?

Let's close the deal first and then we'll see on the disclosures around purchase price and what we do want to disclose. I think we're not at this stage in a position to disclose profitabilities on individual hospitals. Let's close this deal first and move forward. I mean there is a very clear uptick out of this and maybe next quarter once the deal is really closed, we can give you a bit of a better light on what the full year effects are on this transaction. It's clearly a very accretive transaction for us.

Next question from Phi Lin. Was the fall in Singapore's EBITDA margin Q-on-Q due to higher staff cost?

Well, you have some effects out of staff costs in there, but I think primarily effect you have is on the one hand, you have a continued impact on your laboratories business. In our laboratories business, we have a complete fall off of the COVID favorabilities that we had from selling beds to the government and you have basically hardly any COVID related services anymore to the market and I think these are the main drivers. Don't forget we also have probably 1 points, 1.5 points in higher utility costs. Power or utility costs has increased in Singapore quite substantially as well. So I think all this has an impact on overall performance.

The next question from Tyler. Tyler, we'll come back to you as to what the percentage of foreign contribution in Singapore is. So we'll check back to you offline. Next question is from Cox Yang. Looking at the revenue intensity for Singapore year-to-date increased 24% year-on-year. While looking at the past 5 years, the growth range was between 5% to 8%. Any reason for such a strong growth? Is it some more advanced medical services IHH is providing? What kind of growth can we expect in Q4 and 2023?

So you're right. There's always firstly a tidal growth in intensity, right; aging population, newer technology. In Singapore of course we always take pride in keeping things on a cutting edge. We keep launching new specialization. So that is what you typically would see as our increase in case mix every year is probably in the single-digit region. But this relatively big effect they are seeing here is contributed by the change in patient pool that I talked about earlier. The amount of COVID-19 admissions which were really low intensity because it was a collaboration with the public hospitals to decant the less ill COVID-19 patients here into our Singapore hospitals. That has now been replaced by elective surgical work, non-COVID-19 work which is much higher revenue intensity and compared to previous year, foreign travel has come back in big force. And of course foreign patients have a higher intensity, higher even than the domestic surgical patients because they are simply sicker and more complex. So do we expect these continued large uplifts? Not really, it will probably come back to a sort of more normal pace that I talked about.

I think looking at the time, I think we've already answered a fair number of questions. So with that, I would like to conclude the results call. Anything else you want to add?

Let's maybe get back on a couple of key points, right. I think we are now slowly understanding the impact of MFRS 129 that's this MYR 50 million per quarter on the reported income, I think all the rest is rather marginal. Please do note the move in China on Chengdu is really earmarking that we are determined to resolve this. We are reflecting of course as every year-end the asset values that we have in China and I think you should not be surprised that we are very cautious and prudent in our assessments around valuations in China. But what is most important I think is to continue to focus on our underlying growth. That continues. We have been able to show growth year-over-year, quarter-over-quarter. If you look at the long-term trajectory, we basically through the whole COVID period have been able to show earnings growth and show top line growth and we continue to show that. If you look at our underlying earnings plus 6%, net operating income improvement before extraordinary items; I think that's a very strong signal and we continue to work on that and continue on this path.

Okay. Dr. Loh, you have any other comments? And if not, I will wrap up the session.

Thanks so much. Thanks to everyone for participating. Again I think this quarter's results not easy one to understand, but this regards the growth in our core operating performance. And hope the explanation and the session today was useful to all.

Thank you, Dr. Loh. Thank you, Joerg, So with that, we'll now conclude the IHH Healthcare third quarter and 9 months financial results briefing. Thank you for joining us again. And if you have any questions, please contact us at [email protected]. So with that, operator, we may disconnect.

Thank you.

Thank you.

Thank you everyone for participating. You may now disconnect your lines.