Opinion of Independent Financial Advisor
On Connected Transaction of
Bumrungrad Hospital Public Company Limited
No. AP. 016 / 2550
February 16, 2007
Subject Opinion of Independent Financial Advisor on connected transaction of Bumrungrad Hospital Plc.
To The Board of Directors and Shareholders Bumrungrad Hospital Plc.
The Board of Directors meeting no. 1/2550 of Bumrungrad Hospital Plc. ("the Company" or "BH") on January 29, 2007 approved for the Company to waive its future subscription rights to new ordinary shares of Bumrungrad International Co., Ltd. ("BIL") in a maximum amount of 3,714,283 shares each of Bt. 153.52 totaling Bt. 570,216,726.16 to allow Asia Financial Holdings Ltd. or its subsidiary ("AFH") to take up the shares ("the transaction"). The transaction is subject to the condition that 1) AFH and BIL's shareholders must obtain all regulatory approvals or permissions for the transaction, that is BH, BIL, AFH and BIL's existing shareholders must complete the corporate approval process, such as seeking of approval from the board of directors' meeting and the shareholders' meeting and permission from the regulatory bodies, before conducting this transaction, and 2) BH, AFH and BIL's shareholders must amend all agreements relevant to the transaction,namely the Shareholders Agreement and the Share Subscription Agreement where it is concerned with the entrance of AFH as BIL's shareholder, with the agreement signing expectedwithin 90 days from the date of the Board of Director meeting's approval of the transaction
Such waiver of future subscription rights is regarded as a connected transaction with a connected person as Mr. Robin Yua Hing Chan, an authorized director and a major shareholder of AFH, is a brother of Mr. Chatri Sophonpanich and Mr. Chai Sophonpanich, both of whom are directors of the Company.
In accordance with the Stock Exchange of Thailand ("SET")'s notification, the above connected transaction, as calculated from its size which is greater than Bt. 20 million or 3% of the Company's net tangible assets, is subject to the approval of the shareholders' meeting. The letter of invitation to the shareholders' meeting must be accompanied by a report on the Independent Financial Advisor's opinion regarding (1) the reasonableness and benefits of the transaction to the listed company, (2) the fairness of price and conditions of the transaction, and (3) recommendation as to whether the shareholders should vote in favor of the transaction,together with reasons. Therefore, BH has appointed Advisory Plus Co., Ltd. as the Independent Financial Advisor ("the IFA") to provide such opinion to the shareholders.
As the IFA, we would like to give our opinion on the transaction to support the consideration of the Board of Directors and the shareholders, whereby we recommend the shareholders vote in favor of the transaction, with the details as follows:
1. Characteristics and details of the connected transaction
1.1 Type and size of the transaction
The Company originally owned 6,000,000 shares in BIL or 100% of BIL's issued and paid-up share capital. Then on March 30, 2006, BH Board of Directors approved for BIL to increase its share capital to 19,764,701 shares through an issue of 13,764,701 new ordinary shares with a par value of Bt. 100 per share. Such capital increase was split into two portions as follows:- Capital increase no. 1
BIL offered 5,764,701 new shares, or 49% of total ordinary shares after the share offer, for sale by private placement to
1) V-SciencesInvestment Pte. Ltd. ("V-Sciences"),
2) Istithmar PJSC ("Istithmar"),
and 3) Bangkok Bank Plc. ("BBL") at Bt. 153.52 per share totaling Bt. 884.99 million. The Company waived its subscription rights to those shares, thereby diluting its stake in BIL to 51% of the registered capital. At present, BIL has already called the share payment at Bt. 78.52 per share, comprising Bt. 25.00 per share (which is the minimum legal requirement set at 25% of par value) and Bt. 53.52 per share as share premium. The remainder of Bt. 75.00 per share will be called when BIL has a financial need for any of its project investments.
Currently, BIL has a registered capital of Bt. 1,176,470,100, divided into 11,764,701 ordinary shares with a par value of Bt. 100.00 per share, of which Bt. 744,117,525 was paid up.
- Capital increase no. 2
BIL plans to offer 8,000,000 new ordinary shares to its existing shareholders on a pro rata basis, making up a total capital increase of Bt. 800,000,000.
However, BH later decided to find a new strategic partner to become a shareholder of BIL in a bid to reinforce BIL's capability. To do so necessitates a change in the structure of the second capital increase so as to enable the new partner to invest in BIL in the same proportion and with the same conditions as those offered to other existing partners. Hence, in its future capital increase for a maximum of 7,282,908 shares, BIL will make a rights offer to the existing shareholders at Bt. 153.52 per share totaling Bt. 1,118,072,036.16 to fund its large scale investments in the future. In this regard, BH will waive its such future rights to the new BIL shares to allow for AFH or AFH's subsidiary to take up the shares. As such, if BIL needs to raise enormous funds within a limited period, it can immediately call payment from the shareholders under this new capital increase structure without being hindered by BH's financial constraint. If BH wishes to maintain its 51% stake in BIL and must try to acquire funds to meet BIL's desired amount, this will be time consuming and may result in a business opportunity loss for BIL. Therefore, BH Board of Directors meeting on January 29, 2007 approved for the Company to waive its future subscription rights to a maximum of 3,714,283 new ordinary shares in BIL (7,828,908 * 51.00% = 3,714,283) at Bt. 153.52 per share totaling Bt. 570,216,726.16 to allow for AFH to subscribe for those shares ("the transaction").
The said transaction, classified by size, is regarded as a connected transaction in accordance with the SET's notification concerning disclosure of information and acts by listed companies pertaining to connected transactions, B.E. 2546 dated November 19, 2003, and the amendments. The transaction is categorized as a transaction involving an asset or service worth over 3% of the value of net tangible assets of the Company, whereby the Company is obliged to prepare anddisclose a report on the said transaction to the SET and to seek approval for the transaction from the shareholders' meeting. Approval must be given by a vote of not less than three-fourths of the total number of votes of the shareholders who attend the meeting and have the right to vote, excluding the shareholders with vested interest.
1.2 Value and consideration
From this transaction, BIL will receive payment for the shares upon subscription for a maximum amount of 3,714,283 shares at Bt. 153.52 per share totaling Bt. 570,216,726.16.1.3 Connected parties and their related persons
Buyer : Asia Financial Holdings Ltd. or its subsidiary ("AFH")
Seller : Bumrungrad International Co., Ltd. (a BH subsidiary with BH owning a stake of 51.00% of paid-up registered capital)Mr. Robin Yua Hing Chan, an authorized director and a major shareholder of AFH, is a brother of Mr. Chatri Sophonpanich and Mr. Chai Sophonpanich, both of whom are directors of the Company.
Information on Asia Financial Holdings Ltd.
AFH operates as an investment holding company, founded in 2000 and listed on Hong Kong Stock Exchange in the same year. As of December 31, 2005, AFH invested directly and indirectly in 14 subsidiaries.AFH's subsidiary companies
|
Name |
Place of Incorporation |
% of AFH's holding capital |
Nominal value of issued share (HKD) |
Principal activities |
| 1Asia Insurance Company Limited |
Hong Kong |
100.00 |
800,000,000 |
Insurance |
| 2Asia Commercial Bank Limited |
Hong Kong |
100.00 |
810,000,000 |
Banking |
| 3Asia Investment Service Limited |
British Virgin Islands |
100.00 |
10,000,000 |
Investment holding |
| 4AFH Investment (BVI) Limited |
British Virgin Islands |
100.00 |
USD 1,000,000 |
Investment holding |
| 5Asia Insurance Mortgage loan (Finance) Limited |
Hong Kong |
100.00* |
25,000,000 |
financing |
| 6 Chamberlain Investment Limited |
Republic of Liberia |
100.00 * |
USD 100 |
Investment holding |
| 7Progressive Investment Company Limited |
Hong Kong |
100.00 * |
10,000,000 |
Property investment |
| 8Bedales Investment Limited |
Republic of Liberia |
100.00* |
USD 3,000,100** |
Investment holding |
| 9Asia Commercial Bank (Nominees) Provision of Limited |
Hong Kong |
100.00 * |
100,000 |
nominee services |
| 10 Asia Commercial Bank Provision of (Trustee) Limited |
Hong Kong |
100.00 * |
10,000,000 |
trustee services |
| 11Hocomban Investments Limited |
Hong Kong |
100.00 * |
5,000,000 |
Property investment |
| 12Asia Investment Services (HK) Limited |
Hong Kong |
100.00 * |
10,000 |
Investment holding |
| 13Asia Financial (Securities) Limited |
Hong Kong |
100.00 * |
15,000,000 |
Securities brokerage |
| 14Asia Insurance (Investments) Limited |
Hong Kong |
57.00 * |
53,000,000 |
Investment holding |
Note:
* Indirect holding
** Divided into ordinary shares of USD 100 and preferred shares of USD 3,000,000
Source: AFH's 2005 annual report available from www.asia-financial.com
AFH's main subsidiary is Asia Insurance Co., Ltd. ("AI"), which is one of the top five insurance companies in Hong Kong Special Administrative Region (HKSAR). AI's target markets are China and HKSAR.
1.4 Description of the securities
Bumrungrad International Hospital Co., Ltd. ("BIL"), formerly named B. H. Avenue Co., Ltd., was incorporated on January 11, 1990 and renamed on November 2, 2004. It has BH as the major shareholder holding 99.99% of its issued and paid-up capital. BIL later offered its rights issue to the existing shareholders and BH waived the subscription rights to allow for the strategic partners, namely BBL, V-Sciences, and Istithmar, to become BIL's shareholders. As a result, BH's current shareholding in BIL stands at 51.00%.BIL operates as a holding company, by investing in overseas private hospital establishments through joint ventures with local hospitals and also providing management service for hospitals overseas. Presently, BIL has invested in five subsidiaries, namely Bumrungrad International Philippines Inc. ("BIPI"), Neptune Stroika Holding Inc. ("Neptune"), Bumrungrad International Management (Hong Kong) Ltd. ("BIM"), Bumrungrad International Holdings (Hong Kong) Ltd. ("BIH"), and Bumrungrad Hospital Dubai LLC. ("BHD"). Neptune and BIPI made an investment in Asian Hospital Inc. ("AHI") in an amount of 43.25%, or representing BIL's direct shareholding of 35.18% of AHI's paid-up registered capital. AHI runs a private hospital named "Asian Hospital and Medical Center" in the Philippines, while BHD operates a private hospital under the name "Bumrungrad Hospital Dubai" in Dubai, the United Arab Emirates, which is still under construction.
Details of BIL's subsidiary and associated companies
|
BIL's subsidiaries |
% of BIL's shareholding |
Type of business |
Current status |
| 1 Neptune |
39.9 |
Investment company |
Investment in AHI for 13.41%, leading Neptune and BIPI to have a combined stake of 43.25% in AHI. |
| 2 BIPI |
99.9 |
Investment company |
Investment in AHI for 29.83%, leading Neptune and BIPI to have a combined stake of 43.25% in AHI. |
| 3 BIM |
100.0 |
Management services |
No operation yet. |
| 4 BIH |
100.0 |
Investment company |
Still under construction,which is temporarily pending. |
| 5 BHD |
49.0 |
Private hospital business |
Construction of a hospital in Dubai, UAE being underway, with a start of operation scheduled for 2009. |
Shareholding structure as of September 1, 2006
Present shareholding structure
Shareholding structure expected in the future
Note:
V-Sciences is a subsidiary of the Temasek Holding group. Istithmar is an investment-arm subsidiary of Nakheel Corpration, which has the government of Dubai as its major shareholder.
Investments in hospital business by BIL and its subsidiary & associated companies
1) Investment in AHI which operates Asian Hospital and Medical Center in the Philippines
Asian Hospital, Inc. ("AHI") was established in 1999 and commenced operations in March 2002. Located at 2205 Civic Drive, Filinvest Corporate City, Alabang, Muntinlupa of the Philippines, it is a 258-bed hospital on an area of 17,250 sq.m., being the first large scale hospital in Greater Manila. AHI is well known for its modern medical equipment andexperienced physicians, particularly in such specialized field as cardiac program. Currently, it has some 1,104 physicians.
Besides the high quality and modern medical equipment, and the expertise and experience of the physicians and medical staff, AHI has advantage over its rivals in term of location. Muntilupa, which is AHI hospital site, is in the south of Metro Manila being only 13 km. away from Makati, a main business zone, and is adjacent to South Luzon expressway, hence easy transit with several principal areas, including Makati and provinces where new industrial estates are located such as Cavite, Laguna, Rizal and Calabarzon. Thus, transportation to the AHI is fast and convenient. Moreover, the southern area of Manila is a fast-growing area in term of population, so its target customers will likely increase in the future. AHI has segmented its customers into two groups, i.e. general patients and specialty patients.
1) General patients
AHI targets general patients in such zones as Muntinlupa, Las Pinas, Paranaque, Sucat, the northern area of Cavite and northern area of Laguna. As general patients need no special treatment as in the case of specialty patients, they have no need to travel far away to get specific medical treatment. This group of customers is thus people in the areas surrounding the hospital. AHI's major competitor is merely Perpetual Help Medical Center. Although Perpetual Help Medical Center has a higher occupancy rate than AHI (AHI's occupancy rate is around 60%), its facilities cannot be compared to those of AHI in respect of quality and standard level.
2) Specialty patients
AHI's target specialty customers are the people residing in all the areas of Greater Manila Its rivals are St. Luke's Hospital, Makati Medical Center, Medical City General Hospital, Chinese General Hospital, and Manila Doctor's Hospital. These hospitals have over 80% occupancy rate and most have patient waiting lists. However, despite customer acceptability of their medical treatment, their facilities have long been in use being in poor conditions without good maintenance. For AHI, first priority is given to the perfection of its facilities and their regular maintenance. Moreover, AHI has just been in operations for four years, its medical equipment and facilities are modern and still in good condition. This is used as its strength to competing with its competitors and drawing more customers to use its services.
2) Investment in BHD in Dubai, UAE
In 2006, BIL made a joint venture with Istithmar in establishing BHD to operate a private hospital named Bumrungrad Hospital Dubai in Dubai, UAE, with an investment cost of around Bt. 388 million. The hospital offers 125-150 beds intended to serve both expatriates and high income earning local inhabitants. The hospital construction is expected to complete by 2009.
3) Investment in BIH in China
In early 2006, BIH purchased an option to invest in a hospital, which is under construction, in China. When exercised, BIH will have 26.9% shareholding in the hospital, for a total amount of Bt. 35.03 million. Due to a lack of funds arising from failure to make share payment by some partners, the construction cannot be completed.Presently, the construction has been temporarily suspended while awaiting such share payment and seeking a new financially strong partner to enable the project continuation.
1.5 Industry condition and outlook
Profile of the Philippines
Basic information
The Republic of the Philippines is composed of over 7,000 islands covering an area of around 298,170 sq.km. (about three-fifths of Thailand). It has a population of about 85.24 million (2006). Manila is the capital, situated on Luzon Island.Metro Manila refers to Manila and its surrounding cities covering an area of some 636 sq.km. Its population is around 10 million. The zones that make up Metro Manila are Quezon City, Manila, Caloocan City, Pasig City, Valenzuela City, Taguig City, Las Pinas City, Makati City, Marikima City, Muntipula City, Pasay City, Malabon City, Mandaluyong City, Novats, Sun Juan and Pateros.
Map of Greater Manila
Greater Manila refers to Metro Manila and four surrounding provinces as below:
1 Balacan province is in the southwest of Manila covering around 790 sq.km. and with a population of about 1.9 million.
2 Rizal province is in the west of Manila covering around 600 sq.km. and with a population of about 1.7 million.
3 Laguna province is in the northwest of Manila covering around 360 sq.km. and with a population of about 1.3 million.
4 Cavite province is in the north of Manila covering around 610 sq.km. and with a population of about 1.9 million.
Economic information
Agriculture is the Philippines' traditional occupation and most of its population at present are still engaged in this sector. Its cash crops are rice, corn, sugarcane, banana, coconut, mangoes, pineapples, eggs, pork and beef. Classified by the GDP, most of the country's revenues come from service sector, followed by manufacturing principally comprising petroleum refining, chemicals, pharmaceuticals, electronics, furniture, textile, food processing, etc.
GDP and GDP breakdown of the Philippines
| (Unit : Peso billion) |
2003 |
2004 |
2005 |
2006 (Jan-Sep) | ||||
|
Value |
% |
Value |
% |
Value |
% |
Value |
% | |
| Agriculture |
631 |
14.70 |
734 |
15.21 |
777 |
14.45 |
592 |
13.78 |
| Manufacturing |
1,373 |
31.98 |
1,538 |
31.87 |
1,754 |
32.61 |
1,380 |
32.12 |
| Service |
2,289 |
53.32 |
2,554 |
52.82 |
2,848 |
52.95 |
2,325 |
54.10 |
| GDP |
4,293 |
100.00 |
4,826 |
100.00 |
5,379 |
100.00 |
4,297 |
100.00 |
Source: National Statistical Coordination Board (www.nscb.gov.ph)
Hospital business condition in the Philippines
The Philippine hospitals comprise both public and private hospitals. Most private hospitals have higher standard than the public ones. Among the private hospitals, different medical treatment standard can also be seen especially between those in Metro Manila and those outside Manila. Several hospitals in Metro Manila have the quality and standard comparable to those in western countries.
However, even with high standard medical treatment in certain hospitals, a study reveals that the number of patient beds to the size of population is only 1.29 beds to 1,000 persons. This proportion, when compared with countries in Southeast Asia like Thailand, Singapore and Malaysia, is much lower than those of these countries. Thus, it can imply that hospitals in the Philippines have insufficient patient beds to meet the minimum requirement of its people.
Number of patient beds to 1,000 persons in the Philippines compared with other ASEAN countries
No. of population (million persons) * No. of patient beds (10,000 beds) ** No. of patient beds to 1,000 persons Source:
* Basic Statistic 2006, Asian Development Bank (www.adb.org)
** World Health Statistics 2006, World Health Organization (www.who.int)
BIL's investment in hospital business in Dubai, UAE
BIL has invested in healthcare management business in Dubai in the United Arab Emirates. It is a hospital with 125-150 patient beds, located on Sheikh Zayed Road. Target customers are top income earning people residing in the areas from Satwa/Trade Center Road to Ali Village, which are the highest growth areas in Dubai with the richest population. They are both foreign residents and those of Emirates nationality earning more than AED 8,000 per month. The hospital is expected to commence operation in 2009.
Competition
The most potential competitors of BIL's Dubai hospital are Welcare Hospital and American Hospital. American Hospital is a leading hospital of Dubai, having 120 beds and being reputed for supreme services and facilities. It is the first hospital in the Middle East with standard certification from Joint Commission International Accreditation (JCIA). Welcare Hospital is a 100-bed hospital catering for Indian expatriates working in Dubai. Moreover, there are a number of small hospitals that can also be BIL's rivals. However, their target customers are mainly middle-class patients, hence a different market segment from that of BIL.
Industry condition
Profile of United Arab Emirates and Dubai
United Arab Emirates ("UAE") is composed of seven Arabian states, namely Abu Dhabi, Dubai, Sharjah, Ras-Al-Khamiah, Umm Al-Qaiwain, Ajman and Fujairah. UAE became independent from England on December 2, 1978. It has a total area of about 82,880 sq.km., accommodating a population of about 2.5 million. Approximately 75-80% of the people in UAE are expatriate workers. Abu Dhabi is the capital, situated in the state of Abu Dhabi, which is the largest state having the highest number of population and being the most influential politically and economically as UAE's core production base of oil. Dubai ranks the second following Abu Dhabi in term of economic significance, being a state of major port facilities. It covers an area of around 3,885 sq.km. with a population of about 1.2 million.
UAE's main source of revenues is from oil and natural gas. However, for the past years, its national development with rapid growth recorded has relied on income earning from other economic sectors as well, such as tourism, manufacturing, construction, and finance and banking, with Dubai as the growth center. Dubai's revenue structure is different from that of other states. As a free trade area and major port state, linking the Middle East with Africa and Europe, Dubai enjoys earnings mainly from re-export and tourism industry, with only little reliance on oil business.
Hospital business condition in Dubai, UAE
Public hospitals in Dubai provide healthcare services free of charge to people of Emirates nationality and charge minimum rates on foreigners. Meantime, private hospitals charge service fees directly on patients, and on insurance companies in case of insured patients, for both native and foreign patients.
As the Dubai state government has been faced with rising cost of healthcare services of public hospitals while good quality services have to be maintained, it has a policy to have the private sector involved in the healthcare sector. All foreign workers have been required to take out health insurance, which is a policy taking effect at 2004 year-end. Dubai Health Care City ("DHCC") has been set up as the medical service center, located near the airport and about 35-40 minutes drive from BIL's hospital. However, DHCC has yet to be popular among entrepreneurs, as only a number of small healthcare establishments are set up there by some well known hospitals aiming to make referral of patients to their parent hospitals which come mostly from the USA, such as Mayo Clinic, John Hopkins and Harvard Medical.
BIL's registered and paid-up capital
BIL has so far called the share payment for the previous capital increase from BBL, V-Science and Istithmar at only 25% of the par value, leading it to have a paid-up capital of Bt. 744,117,525 at present. Given BIL calls the remaining 75% share payment from the three partners before it makes the future rights offering of 7,282,908 shares, BIL will then have a paid-up registered capital of Bt. 1,176,470,100 before such new 7,282,908 shares offering.
After completion of the future rights offer of 7,282,908 shares and the share payment in full, BIL's paid-up registered capital will become Bt. 1,904,760,900.
|
No. of shares |
Registered capital (Baht) |
Paid-up capital (Baht) | |
| Existing |
11,764,701 |
1,176,470,100 |
744,117,525 |
| Before capital increase * |
11,764,701 |
1,176,470,100 |
1,176,470,100 |
| After capital increase * |
19,047,609 |
1,904,760,900 |
1,904,760,900 ** |
Note:
* Assuming that BIL calls the remaining 75% share payment from BBL, V-Science and Istithmar before making the future rights offering of 7,282,908 shares.
**Assuming that BIL calls payment for the 7,282,908 new shares in full.
List of shareholders as of January 12, 2007
|
Name |
No. of shares |
% |
| 1.Bumrungrad Hospital Plc. |
5,999,994 |
51.0 |
| 2.Istithmar PJSC |
2,294,117 |
19.5 |
| 3.V-Sciences Investment Pte. Ltd. |
2,294,117 |
19.5 |
| 4.Bangkok Bank Plc. |
1,176,470 |
10.0 |
| 5.Mr.Chai Sophonpanich |
1 |
0.00 |
| 6.Mr.Dhanit Dheandhanoo |
1 |
0.00 |
| 7.Mrs. Linda Lisahapanya |
1 |
0.00 |
| Total |
11,764,701 |
100.00 |
BIL Board of Directors
The Board of Directors comprises five members as follows:
|
Name |
Position |
| 1. Mr. Curtis John Schroeder * |
Director |
| 2. Mr. Carl Vincent Stanifer * |
Director |
| 3. Mr. Sandesh Pandhare |
Director |
| 4. Mr. Chong Toh |
Director |
| 5. Mr. Tan Cheong Hin |
Director |
Note:
* Representatives of BH.
Financial status
BIL's financial status and performance, duly audited by the auditor, for 2003-2005 and its internal financial statements for January-September of 2006 are tabulated below:
|
(Unit: Bt. 000's) |
Company Only |
Consolidated | ||||
|
2003 |
2004 |
2005 |
2006(Jan-Sep)* |
2005 |
2006 (Jan-Sep) | |
| Current assets | ||||||
| Cash and deposits at financial institutions |
757 |
778 |
95,678 |
454,264 |
109,119 |
465,569 |
| Accounts receivable-net |
- |
- |
171 |
4,354 |
22,944 |
49,058 |
| Other current assets |
- |
- |
20,817 |
71,584 |
10,822 |
19,103 |
| Total current assets |
757 |
778 |
116,666 |
530,202 |
142,885 |
533,730 |
| Non-current assets | ||||||
| Investments by the equity method |
- |
- |
238,395 |
417,645 |
506,202 |
503,699 |
| Other investments |
- |
- |
- |
- |
- |
14,436 |
| Long-term loans and accrued interest receivable - related business |
- |
- |
204,214 |
25,634 |
- |
- |
| Equipment - net |
- |
- |
539 |
510 |
539 |
510 |
| Intangible assets- net |
- |
- |
121,487 |
115,683 |
121,487 |
115,683 |
| Total non-current assets |
- |
- |
564,636 |
559,473 |
628,228 |
634,328 |
| Total assets |
757 |
778 |
681,302 |
1,089,675 |
771,114 |
1,168,058 |
| Liabilities and shareholders' equity Current liabilities | ||||||
| Short-term advance from corporates |
- |
- |
5 |
10,210 |
5 |
10,210 |
| Accrued expenses |
20 |
20 |
6,182 |
9,121 |
11,764 |
13,900 |
| Deferred income |
- |
- |
33,607 |
26,833 |
33,607 |
26,833 |
| Other current liabilities |
- |
- |
956 |
897 |
4,632 |
897 |
| Total current liabilities |
20 |
20 |
40,751 |
47,061 |
50,009 |
51,840 |
| Non-current liabilities | ||||||
| Long-term advance from corporates |
407 |
734 |
- |
- |
- |
- |
| Total liabilities |
427 |
754 |
40,751 |
47,061 |
50,009 |
51,840 |
| Shareholders' equity Share capital Issued and paid-up capital 6,000,000 ordinary shares each of Bt. 100 par value |
1,000 |
600,000 |
600,000 |
744,118 |
600,000 |
744,118 |
| Share payment receivable |
- |
(599,000) |
- |
- |
- |
- |
| Deviation from translation of financial statement |
- |
- |
29,394 |
18,995 |
29,394 |
18,995 |
| Retained earnings (losses) |
(671) |
(976) |
11,157 |
(29,025) |
11,157 |
(29,025) |
| Total shareholders' equity |
329 |
24 |
640,551 |
1,042,614 |
640,551 |
1,042,614 |
| Total minority interest of subsidiaries |
- |
- |
- |
- |
80,553 |
73,604 |
| Total liabilities and shareholders' equity |
757 |
778 |
681,302 |
1,089,675 |
771,114 |
1,168,058 |
| Revenues | ||||||
| Service income |
- |
- |
25,006 |
26,811 |
48,264 |
46,539 |
| Interest receivable |
- |
- |
3,742 |
6,973 |
1,874 |
3,640 |
| Gains on foreign exchange |
- |
- |
760 |
(3,246) |
744 |
(3,370) |
| Other income |
- |
- |
767 |
- |
767 |
- |
| Sharing of gains on investments by the equity method |
- |
- |
28,597 |
- |
887 |
- |
| Total revenues |
- |
- |
58,872 |
30,538 |
52,538 |
46,809 |
| Expenses | ||||||
| Depreciation and amortization |
- |
- |
4,426 |
5,835 |
4,426 |
5,835 |
| Administrative expenses |
20 |
272 |
30,118 |
49,373 |
41,320 |
71,152 |
| Sharing of loss by the equity method |
12,191 |
15,512 |
14,580 | |||
| Total expenses |
20 |
272 |
46,735 |
70,720 |
45,747 |
91,567 |
| Earnings (Losses) before interest and tax |
(20) |
(272) |
12,137 |
(40,182) |
6,791 |
(44,758) |
| Interest expense |
(27) |
(33) |
(3) |
- |
(33) |
- |
| Corporate income tax |
- |
- |
- |
- |
(297) |
- |
| Earnings (Losses) before minority interest |
(47) |
(306) |
12,134 |
(40,182) |
6,462 |
(44,758) |
| Minority interest |
- |
- |
- |
- |
5,671 |
4,576 |
| Net profit (loss) for the year |
(47) |
(306) |
12,134 |
(40,182) |
12,134 |
(40,182) |
* Note: Internal financial statements
Financial ratios
| (Jan-Sep) |
2003 |
2004 |
2005 |
2006 |
| Current ratio (times) |
37.85 |
38.90 |
2.86 |
9.92 |
| Return on assets (%) |
(6.21) |
(39.33) |
1.57 |
(3.44) |
| Debt to equity ratio (times) |
1.30 |
31.42 |
0.07 |
0.05 |
| Return on equity (%) |
(14.29) |
(1,275) |
1.68 |
(3.59) |
Financial status and operational performance
Total assets
Total assets according to the 2003-2005 financial statements were Bt. 0.76 million, Bt. 0.78 million and Bt. 771 million respectively. Since in 2003 and 2004, BIL did not make any capital increase, its cash and deposits at banks were thus in small amounts. The increase in total assets in 2005 was attributed to BIL's investment in four subsidiary companies, i.e. Bumrungrad International Philippines Inc. ("BIPI"), Neptune Stroika Holding Inc. ("Neptune"), Bumrungrad International Holdings (Hong Kong) Ltd. ("BIH") and Bumrungrad International Management (Hong Kong) Ltd. ("BIM"). BIPI and Neptune made investment in AHI in March 2005, while BIH and BIM have not yet invested in any business. BIL's cash and deposits at financial institutions in 2005 accordingly surged to Bt. 109 million and investment recorded by the equity method was Bt. 506 million.
As of September 30, 2006, BIL's total assets were Bt. 1,168.06 million, increasing by Bt. 396.95 million or 51.48% from 2005 year-end's Bt. 771.11 million. Such sharp growth was ascribed to a rise in cash and deposits at financial institutions from Bt. 109.12 million at end-2005to Bt. 465.57 million after a sale of newly issued shares worth Bt. 884.99 million of which Bt. 452.65 million was paid up in July 2006.
Total liabilities and shareholders' equity
Total liabilities under the financial statements for 2003-2005 were Bt. 0.43 million, Bt. 0.75 million and Bt. 50.01 million respectively. The increase in 2005 resulted from deferred income derived from the patent fee on the computer program that BIL sold to AHI, which was gradually recognized as patent right income over the agreement term and accounted for Bt. 32.6 million as of December 31, 2005.
BIL's total liabilities as of September 30, 2006 stood at Bt. 51.84 million, up slightly from end-2005 of Bt. 50.01 million. The top increase was advance from corporates of Bt. 10.2 million, a part of which was a consulting fee that BIL is to pay to BH at Bt. 55 million a year, divided into quarterly installments each of Bt. 13.75 million with the agreement taking effect in August 2006.
Shareholders' equity under the financial statements for 2003-2005 amounted to Bt. 0.33 million, Bt. 0.024 million and Bt. 721.10 million respectively. The sharp increase in 2005 came from the shareholders' payment for new shares amounting to Bt. 599 million, resulting in BIL's paid-up capital of Bt. 600 million.
The shareholders' equity as of September 30, 2006 amounted to Bt. 1,116.22 million, surging from Bt. 721.10 million at end-2005 by Bt. 395.12 million. The increase was due partly to receipt of share payment of Bt. 452.64 million in July 2006. However, BIL posted retained losses of Bt. (29.02) million, which plus the deviation from translation of financial statement of Bt. 18.99 million and minority interest of Bt. 73.60 million resulted in the shareholders' equity of Bt. 1,116.22 million.
Operational performance
During 2003-2004, no income was recorded by BIL as no investment had been made yet. In 2005, nearly all of its income came from service income amounting to Bt. 48.26 million. Of this total, Bt. 23.26 million was from hospital management service for AHI, Bt. 2.27 million from management of Square International Hospital in Bangladesh, and Bt. 10.14 million from management of Pun Hlaing International Hospital in Myanmar. The management agreements for the latter two hospitals were later terminated. The remaining income of Bt. 12.59 million came from the sale of patent right over and installation of the computer program for AHI.
In the first nine months of 2006, nearly all income came from service, accounting for Bt. 46.54 million, of which Bt. 35.38 million was from hospital management service and the rest Bt. 11.16 million from the sale of patent right over and installation of the computer program for AHI.
BIL's expenses in 2003-2004 only came from selling and administrative expense as there had been no investment yet. For 2005, it recorded administrative expense of Bt. 41.32 million. The increase in expense was attributable to its investment in AHI, from which expense on procurement of computer program was incurred for use in the hospital operations overseas.
In the first three quarters of 2006, BIL incurred total expenses of Bt. 91.57 million, mainly consisting of administrative expense and depreciation & amortization of computer programs procured for use in the hospital operations overseas. The dramatic rise in administrative expensewas caused by a provision for impairment on investment in China of Bt. (19.54) million and a consulting fee payable to BH under the management service agreement at Bt. 55 million per year, divided into quarterly installments each of Bt. 13.75 million with the agreement taking effect in August 2006.
Net profit (loss) under the 2003-2005 financial statements amounted to Bt. (0.048) million, Bt. (0.31) million and Bt. 12.13 million respectively. The loss incurred in 2003-2004 was because BIL had not yet generated income from operations but already borne selling and administrative expense. For 2005, it brought in some service income and shared earnings on investment, resulting in profit generation.
In the first nine months of 2006, BIL recorded a net loss of Bt. (40.18) million. Such loss came partly from sharing of loss on investment by the equity method amounting to Bt. (14.58) million incurred from loss on investment in AHI made by BIL through BIPI and Neptune, and partly from provision for impairment on investment in China of Baht (19.54) million incurred from temporary suspension of the project.
Financial ratios
In 2003 and 2004, BIL recorded current ratio of 37.85 and 38.90, which were very high, as it had not made any investment yet, hence a minimal amount of current liabilities. In 2005, BIL invested in AHI, pulling down its current ratio to the normal level as in other businesses. BIL's current ratio of 2.86 in 2005 reflected faster growth in current assets than in current liabilities. Most of the increase in current assets came from the increase in cash & cash equivalents and accounts receivable in line with the rising service income in 2005.
In the first nine months of 2006, the current ratio mounted sharply to 9.92 when compared with that at year-end 2005. This was due to a drastic surge in current assets resulting from cash and deposits at banks obtained from the capital increase in July 2006, whereas the current liabilities grew only marginally.
Return on assets during 2003-2005 was (6.21)%, (39.33)% and 1.57% respectively. The negative return in 2003-2004 was due to BIL's operating loss. The return went up in 2005, resulting from the rise in profit following its investment in AHI which brought in service income and income from sharing of earnings by the equity method.
In the first nine months of 2006, the ROA remained negative at (3.44)%, caused by an operating loss of Bt. (40.18) million coming partly from realized loss on loss sharing from investment by the equity method and provision for a decline in value of investments in China.
Debt to equity ratio was 1.30 in 2003, 31.42% in 2004 and 0.07% in 2005. The drop in 2005 was attributed to BIL's capital increase of Bt. 599 million, which considerably pushed up its shareholders' equity.
The D/E ratio in the first nine months of 2006 dropped to just 0.05%, resulting from the capital increase in July which drove BIL's shareholders' equity up from Bt. 640.55 million at the end of 2005 to Bt. 1,042.61 million as of September 30, 2006.
During 2003-2005, return on equity was posted at (14.29)%, (1,275)% and 1.68 % respectively. The negative return in 2003-2004 came from the loss incurred as BIL had not yet invested in any business, hence only expenses were registered. In 2005, the ROE surged following profit generated from operation in that year.
In the first nine months of 2006, the ROE turned negative at (3.59)%, due to an operating loss incurred by BIL.
2. Reasonableness of the transaction
2.1 Objective and necessity of the transaction
BIL is a holding company, engaging mainly in investments in private hospital operations overseas in collaboration with local investors in those countries. It also provides advisory and management services on hospital business. So far, BIL has invested in five subsidiary companies, i.e. BIPI, Neptune, BIH, BIM and BHD. BIPI and Neptune made an investment in AHI, which runs a private hospital business in the Philippines, in an amount of 42.35% of AHI's paid-up registered capital. Meantime, BHD invested in Bumrungrad Hospital Dubai to operate a private hospital in Dubai, UAE. BIH invested in a hospital business in China, but the project has been temporarily suspended. BIM has not yet operated any business.
Since their investment in BIL in July 2006, the strategic partners have been very supportive of growing BIL at a faster and larger pace than what had initially been anticipated as they foresee very bright prospects in healthcare investments in the region. The Company is likewise supportive of this fast growth strategy, but is cognizant of its own financial limitations and the potential risks this international expansion strategy could have on the Company.
First, the Company has already planned for substantial capital expenditures to expand and refurbish the flagship facility in Bangkok over the next few years. As of September 30, 2006, it had an obligation to pay for the building construction cost of Bt. 119.8 million and the medical and hospital equipment of Bt. 175.6 million, making Bt. 295.4 million in total. These will be primarily funded by internal cash flows and bank loans. Any efforts in expanding international investments could crowd out this local investment plan.
Second, investments in greenfield projects (such as Dubai) and acquisitions of existing healthcare facilities (such as AHI) generally have higher risk profile and longer pay-back than investments in matured facilities (such as the facilities in Bangkok). As a result, the Company could be adversely impacted in the short-term from lower earnings, worsened financial ratios, and large cash outflows which could potentially put pressure on market share price and also put the Company's dividend payments at risk.
Alternatively, the Company could maintain its 51% shareholding in BIL and try to meet the funding requirements of BIL by raising its own equity capital in the future. However, the funding process of the Company will likely take time which may not be compatible with BIL's needs. In addition, the capital increase will impact BH's shareholders in terms of a fall in earnings per share and market price of BH share. If the Company chooses to borrow from a financial institution to purchase BIL shares, it will have to bear interest expense, while it will take several years before the Company can enjoy positive returns on such investment in BIL. After all, it is also time-consuming to establish market awareness and brand royalty among customers and it is still uncertain whether the new business invested will be successful. BH has decided to reduce its shareholding in BIL and seek strategic partners to ensure a greater success for BIL through their introduction of investment opportunities in promising businesses, use of personal relationship to facilitate the operations of BIL and its subsidiaries, and financial readiness to invest in BIL.
To avoid these shortcomings but at the same time continue to commit to the international expansion strategy of BIL, the Company has decided to bring another strategic shareholder into BIL who has both the financial wherewithal and the understanding of the risks involved. Asia Financial Holdings Limited, a related party of the Company, has these vital characters and will also bring in other value added benefits to the partnership, particularly their strong business connections in China, Taiwan and Hong Kong
Therefore, the meeting of the Board of Directors of the Company on January 29, 2007 resolved to approve to waive its rights to subscribe to not more than 3,714,283 shares of BIL at Bt. 153.52 per share, and to offer these unsubscribed rights to AFH. As a result of the future issuance of 7,282,908 shares by BIL, the waiver of rights by the Company to subscribe to 3,714,283 shares, and the purchase of 3,714,283 shares by AFH, AFH will become a 19.5% shareholder in BIL, while the Company's shareholding is reduced from 51.0% to 31.5%.
2.2 Pros and cons between making and not making the transaction
2.2.1 Pros
a) Reduction of investment risk in BIL
BIL is a BH subsidiary, established as a holding company to make investments in private hospital operations and provision of management services to hospitals overseas. BIL's investments in hospitals overseas bear different and higher risk profiles than in local hospitals (Bumrungrad Hospital) that it is running. That is, investments in greenfield projects such as the hospital in Dubai are capital-intensive with longer pay-back period and time-consuming brand loyalty establishment. In the case of acquisitions of existing healthcare facilities such as the investment in AHI, BIL will need a considerable amount of time to rationalize the operations and turn around the working results and financial health before it can enjoy returns on the investments. This type of investments may adversely affect BIL's financial position and performance at the early stage and ultimately hurt its consolidated financial statements.
Therefore, doing the transaction is to mitigate risk from investment in BIL.
b) Increase of strategic partners for BIL
This transaction will add another business partner for BIL and hence augur well for its operations that focus on investment in hospital establishments overseas. AFH owns a subsidiary, Asian Insurance Co., Ltd. ("AI"), which is one of the top five life insurance companies in Hong Kong Special Administrative Region (HKSAR). AI's current target markets are China and HKSAR. AFH additionally plans to diversify the scope of its investments to healthcare business in other countries. The entrance of AFH as a strategic partner of BIL will enable the latter to obtain through AFH greater investment opportunities in hospital businesses in China and HKSAR and to further expand its customer bases in those countries through AFH's connection as hospital and life insurance are related businesses.
c) Reduction of the Company's investment burden
From this transaction, BH will not need to acquire funding in case BIL makes the rights issue. As mentioned earlier, the Company has already planned for substantial capital expenditures to expand and refurbish the flagship facility in Bangkok over the next few years which will be primarily funded by internal cash flows and bank loans.
Any efforts in expanding international investments could crowd out this local investment plan.
2.2.2 Cons
Impacts on voting rights, control power and profit sharing of the existing shareholders This transaction will lead BH's shareholding, voting rights, control power, and sharing of profit/loss in BIL to scale down from 51.00% to 31.50% of BIL's registered capital.Nonetheless, BH will remain BIL's largest shareholder with a stake of 31.50%. Since BH is the only BIL shareholder engaged in the hospital business, whereas all other shareholders are simply investors, they accordingly have to rely on the Company's hospital management experience. Moreover, it can be said that the Company still has a bargaining and controlling power in BIL in respect of voting against any special resolutions. Pursuant to the Civil and Commercial Code, any special resolution of shareholders of a limited company on such issues as capital increase or decrease, business dissolution, etc. must be passed through two shareholders' meetings, the first with a required vote of three-fourths of the total number of votes and the second with a required vote of two-thirds of the total number of votes.
Therefore, despite BH's diluted shareholding in BIL from 51.00% to 31.50%, the Company will still have a management or control power according to its stake portion in BIL and have AFH and BBL as its alliances.
2.3 The transaction made with a connected party vs. the transaction made with an outsider
The offer price of Bt. 153.52 per share is the same price as that approved by the shareholders' meeting on May 15, 2006 for BIL's rights offer, which were waived by the Company to allow for the strategic partners, namely BBL, V-Sciences and Istithmar, to subscribe for the shares.
We are of the opinion that the transaction, though made with a connected party, will benefit both BH and BIL. Given that BH waives its rights and allocates the shares to an outsider instead of AFH, it will likely take time to find an interested party, conduct a due diligence, and negotiate with the prospective investor that has . potential and readiness in terms of financial sources and knowledge on hospital business, thus potentially leading BIL to lose the business opportunity. Better still, the cordial relationship between the executives of AFH and BH will enable BIL to gain a good partner and increase its business opportunity in China.
The rights waiver will lessen BH's shareholding and control power in BIL, against the backdrop that the Company, BBL, AFH, V- Science and Istithmar are independent in their decision making. However, the shares waived by BH will be allotted to AFH, which is its connected party, and, with their good relationship, the Company can seek AFH's cooperation in various activities such as the board of directors' meeting or the shareholders' meeting. With AFH's cooperation in the shareholders' meeting, the Company, BBL and AFH will have a combined stake and control power of 61.00% in BIL, which is sufficient to control any vote on a general resolution at the meeting that requires 51.00% of the total number of votes. However, it is not enough to control voting on a special resolution, which requires a vote of three-fourths of the total number of votes at the first shareholder's meeting and a vote of two-thirds of the total number of votes at the second meeting. Given however that AFH is not cooperative, the Company alone still has a stake and control power of 31.50% in BIL, which is adequate to control BIL in such a way as to object the special resolution as in 2.2.2.
The rights waiver by BH to have AFH, its connected party, subscribe for BIL shares is considered a connected transaction in accordance with the notification of the SET and this transaction is worth more than Bt. 20 million and 3% of BH's net tangible assets.To conform to the said SET notification, the Company will call an extraordinary general meeting of shareholders no. 1/2550 on March 12, 2007 to consider and approve this transaction. It will also arrange for an independent financial advisor to provide opinion on the transaction for the small shareholders. The transaction is subject to approval from the shareholders' meeting with a vote of at least three-fourths of the total number of votes of the shareholders attending the meeting and having voting rights, exclusive of the shareholders with vested interest.
For the reasons above, we view that this transaction will, better than the transaction made with an outside party, enable the Company to achieve its objective of reducing the shareholding in BIL to cushion the impact from BIL's operations and acquire a strategic partner with financial readiness and ability to support the business of BIL and its subsidiaries. This transaction, made with a connected party which is BH's familiar alliance, will help to maintain the Company's control power in BIL. Besides, in the approval of this connected transaction, the parties with vested interest are not entitled to vote. The transaction is thus considered reasonable and beneficial to both the Company and BIL in the long run.
3. Fairness of price and conditions of the transaction
3.1 Appropriateness of price and other consideration
BH Board of Directors meeting no. 1/2550 on January 29, 2007 approved for the Company to waive its future rights to subscribe for a maximum of 3,714,283 BIL shares at Bt. 153.52 per share totaling Bt. 570,216,726.16 to allow for AFH or its subsidiary to take up the shares.
We have made BIL share price valuation by various approaches to figure out the most appropriate price and give the opinion on the fairness of the price. Details are as follows:
3.1.1 Book value (BV) approach
By this approach, the share valuation is made based on the book value derived from BIL's internal consolidated financial statements ended September 30, 2006. The outcome is as follows:
|
Item |
Amount |
| Shareholders' equity * (Bt. million) |
1,042.61 |
| No. of paid-up shares (million shares) |
11.76 |
| Book value per share (Bt.) |
88.66 |
* Excluding minority interest.
The share price using this method does not take into account the business profitability in the future and may not reflect the real market value of the assets. It instead reflects the book value at a certain point of time. Based on BIL's financial statements as of September 30, 2006, its book value is Bt. 88.66 per share, which is lower than the offering price of Bt. 153.52 per share by Bt. (64.86) per share or (42.25)%.
3.1.2 Adjusted book value (ABV) approach
The share price by this method is worked out by deducting BIL's total liabilities as of September 30, 2006 out of its total assets as of the same date, adjusted by commitments and contingent liabilities together with anincrease or decrease in market value of fixed assets appraised by an independent appraiser, and divided by the total number of BIL shares.
As BIL is a holding company, not a manufacturing company or property business, most of its assets are in form of investments in subsidiary companies, and cash and short-term investment. Based on its internal financial statements as of September 30, 2006, BIL's fixed assets are in form of equipment worth Bt. 0.51 million and computer software of Bt. 92.26 million, not land which can enjoy higher price in the future. Thus, no revaluation of the fixed assets has been made. Details of the net asset value are as follows:
Unit: Bt. million
|
Item |
Amount |
| Total assets |
1,168.05 |
| Less Total liabilities |
(51.84) |
| Minority interest |
(73.60) |
| Asset value |
1,042.61 |
| Additional share call 1/ |
432.35 |
| Provision for loss on investments 2/ |
(15.49) |
| Commitments and contingent liabilities |
(0.72) |
| Net asset value |
1,458.75 |
| Total number of shares (million shares) |
11.76 |
| Net asset value per share (Bt.) |
124.04 |
1/ In 2006, BIL issued and offered new shares to V-sciences, Istithmar and BBL in a total amount of Bt. 885 million. In July 2006, BIL received a partial share payment of Bt. 452.65 million, leaving an unpaid capital of Bt. 432.35 million.
2/ In early 2006, BIH purchased an option to invest in a hospital in China in joint venture with the native investors. When exercise, BIH will have 26.9% shareholding in the hospital, for a total amount of Bt. 35.03 million Due to failure by other shareholders to make the share payment leading to pending the construction, the Company accordingly made a provision for impairment on such investment in an amount of Bt. 19.54 million in 2006. However, since the project still risks failing to be completed, we have made adjustment by increasing the said provision to cover the remaining amount of Bt. 15.49 million.
BIL's share price by this method is Bt. 124.04 per share, which is lower than the offering price by Bt. (29.48) or (19.20)%. The share price so derived can better reflect BIL's real value than that by the book value approach shown in 3.1.1, as it takes into account the commitments and contingent liabilities and the increase or decrease in market value of fixed assets.
However, the ABV approach does not take into consideration the operating result and the competitiveness of the business in the future, as well as the overall economic and industry conditions.
3.1.3 Price to book value (P/BV) approach
By this method, the share price is derived by multiplying the book value of BIL in the internal consolidated financial statements ended September 30, 2006, which is Bt. 88.65 per share, by the average P/BV ratio of 14 peer companies listed on the stock exchanges of Singapore, Malaysia (Kuala Lumpur), and Thailand (SET), as listed here:
|
Company |
Stock symbol |
Stock exchange |
| 1. Bangkok Dusit Medical Services Plc. 1/ |
BGH |
SET |
| 2. Krungdhon Hospital Plc. 1/ |
KDH |
SET |
| 3. Bangkok Chain Hospital Plc. 1/ |
KH |
SET |
| 4. Nonthavej Hospital Plc. 1/ |
NTV |
SET |
| 5. Ramkhamhaeng Hospital Plc. 1/ |
RAM |
SET |
| 6. Sikarin Plc. 1/ |
SKR |
SET |
| 7. Samitivej Plc. 1/ |
SVH |
SET |
| 8. Vibhavadi Hospital Plc. 1/ |
VIBHA |
SET |
| 9. Pantai Holdings BrHD 2/ |
HPA |
Kuala Lumpur Stock Exchange |
| 10. KPJ Healthcare BrHD 2/ |
KPJ |
Kuala Lumpur Stock Exchange |
| 11. Health Management International Ltd. 3/ |
HMI |
Singapore Stock Exchange |
| 12. Parkway Holdings Ltd. 3/ |
PWAY |
Singapore Stock Exchange |
| 13. Raffles Medical Group Ltd. 3/ |
RFMD |
Singapore Stock Exchange |
| 14. Thomson Medical Center Ltd. 3/ |
THOM |
Singapore Stock Exchange |
1/ Only hospital businesses listed on the SET and located in Bangkok are taken into consideration.
2/ These are all hospital businesses listed on Kuala Lumpur Stock Exchange.
3/ These are all hospital businesses listed on Singapore Stock Exchange. The average P/BV ratios of the 14 peer companies over the past 3 months, 6 months, 9 months and 12 months ended January 26, 2007 are as below:
|
Average of past |
Domestic hospitals (times) |
Overseas hospitals (times) |
Avg (times) | ||||||||||||
|
BGH |
KDH |
KH |
NTV |
RAM |
SKR |
SVH |
VIBHA |
HPA |
KPJ |
HMI |
PWAY |
RFMD |
THOM | ||
| 3 months |
4.22 |
4.49 |
0.71 |
1.51 |
2.50 |
1.70 |
0.86 |
3.05 |
2.09 |
0.94 |
2.06 |
6.27 |
3.62 |
1.81 |
2.56 |
| 6 months |
4.11 |
4.18 |
0.71 |
1.35 |
2.34 |
1.61 |
0.83 |
2.85 |
2.03 |
0.92 |
2.00 |
5.55 |
3.52 |
1.58 |
2.40 |
| 9 months |
4.18 |
3.98 |
0.70 |
1.31 |
2.23 |
1.65 |
0.82 |
2.64 |
1.98 |
0.86 |
2.05 |
5.08 |
3.31 |
1.50 |
2.31 |
| 12months |
4.09 |
3.73 |
0.66 |
1.27 |
2.11 |
1.68 |
0.79 |
2.38 |
1.91 |
0.83 |
2.00 |
4.87 |
3.14 |
1.44 |
2.21 |
* Available from www.setsmart.com and Bloomberg.
The calculation formula under this share valuation method: share value = [P/BV Ratio * Book Value (Bt.88.66 per share) BIL shares have no liquidity because BIL is not a listed company in any stock exchanges as in the case of other reference companies.
We thus have the average price to book value ratio of the listed companies referred to above discounted by about 10-15%. The share price so derived will come out as follows:
|
Period |
Avg. P/BV (times) of peer companies* |
Share price (Bt./share) | |
|
Discount 10% |
Discount 15% | ||
| Average of past 3 months |
2.56 |
204.27 |
192.92 |
| Average of past 6 months |
2.40 |
191.51 |
180.87 |
| Average of past 9 months |
2.31 |
184.32 |
174.08 |
| Average of past 12 months |
2.21 |
176.34 |
166.55 |
Note: * Data available from www.setsmart.com and Bloomberg
By this approach, the share price of BIL will be Bt. 166.55 - 204.27 per share, which is higher than the offering price of Bt. 153.52 per share by Bt. 13.03 Bt.- 50.75 or 8.49% - 33.06%.
This approach mainly uses the book value and the average P/BV of listed companies as the basis in figuring out the share price, relying on the share value on any single day of the business and reflecting only the asset value in the past. The share price so derived may thus fail to reflect the real market value of the assets at present and the business profitability in the future.
3.1.4 Market value approach
By this method, the market trading price of the shares retroactively from January 26, 2007 should be adopted. However, as BIL is not a listed company on any stock exchanges, there is no market price to be used as reference. This approach is thus not applicable to BIL.
3.1.5 Price to earnings ratio (P/E) approach
The share price by this method is derived by multiplying the projected net earnings per share of BIL in 2007 by the average P/E ratio of the 14 peer companies listed on the stock exchanges of Singapore, Malaysia (Kuala Lumpur), and Thailand (SET). These companies are the same group as those referred to in 3.1.3. Their average P/E ratios over the past 3 months, 6 months, 9 months, and 12 months ended January 26, 2007 are shown below:
|
Average of past |
Domestic hospitals (times) |
Overseas hospitals (times) |
Avg (times) | ||||||||||||
|
BGH |
KDH |
KH |
NTV |
RAM |
SKR |
SVH |
VIBHA |
HPA |
KPJ |
HMI |
PWAY |
RFMD |
THOM | ||
| 3 months |
32.09 |
15.05 |
8.85 |
24.68 |
12.71 |
7.45 |
17.30 |
19.29 |
65.05 |
11.51 |
25.99 |
37.67 |
32.27 |
20.83 |
23.62 |
| 6 months |
32.67 |
14.22 |
10.19 |
24.09 |
12.39 |
7.33 |
15.44 |
19.41 |
55.64 |
11.25 |
25.20 |
35.76 |
31.36 |
18.29 |
22.37 |
| 9 months |
34.50 |
14.15 |
11.24 |
24.87 |
12.24 |
7.65 |
15.02 |
19.24 |
45.05 |
10.60 |
22.88 |
33.58 |
29.53 |
17.50 |
21.29 |
| 12months |
35.41 |
13.92 |
10.56 |
24.65 |
12.06 |
8.46 |
14.81 |
18.17 |
38.20 |
10.24 |
21.08 |
32.32 |
28.01 |
16.81 |
20.34 |
The calculation formula under this share valuation method:
Share Value = [P/E Ratio *project net earning in 2007.Bt. 1.58 per share)
* Source: Based on the financial projection by IFA, with net profit in 2007 estimated at Bt. 18.59 million or representing projected net earnings per share of Bt. 1.58 (11.76 million shares). The assumption refers to the attachment.
As BIL is not a listed company on any stock exchanges as in the case of other reference companies, resulting in non-liquid shares, we use the average P/E ratio of the above peer companies discounted by about 10-15% and multiplied by projected net earnings per share in 2007 (Bt. 1.58). The share price will come out as follows:
|
Period |
Avg. P/E (times) of peer companies* |
Share price (Bt./share) | |
|
Discount 10% |
Discount 15% | ||
| Average of past 3 months |
23.62 |
33.59 |
31.72 |
| Average of past 6 months |
22.37 |
31.81 |
30.04 |
| Average of past 9 months |
21.29 |
30.27 |
28.59 |
| Average of past 12 months |
20.34 |
28.92 |
27.32 |
Note : * Data available from www.setsmart.com and Bloomberg
By this approach, the share price of BIL will be Bt. 27.32 - Bt. 33.59 per share, which is lower than the agreed price of Bt. 153.52 per share by Bt. (126.20) - Bt. (119.93) or (82.21)% - (78.12)%. This approach reflects BIL's profitability for only 1-year period without taking into account its future profitability.
3.1.6 Discounted cash flow approach
This approach takes into account the future performance of BIL (company only), AHI and BHD by figuring out the present value of discounted free cash flow expected for BIL (company only), AHI and BHD (in proportion to BIL's shareholding in AHI and BHD) in each year from the financial projection for 2007-2016, assuming the three companies' operations on a going concern basis without any material changes and under the current economic and business circumstances.
The financial projection has been prepared by the Company and the Company's financial advisor. We have examined and made adjustments to be relevant to and with due consideration of the factual information we have received under the current economic circumstances and as allowed by the information available at present. Any material changes in the future may have impacts on the share valuation.
Thus, the share price derived from the discounted cash flow approach may change if there are any material changes in the external factors that will have impacts on the business operations.
The discount rate used is calculated based on the weighted average cost of capital (WACC) of BIL, AHI and BHD. The calculation of WACC is as below:
- Average cost of debt (Kd) is projected at zero for BIL as it bears no borrowing, and 8.16% - 13.18% interest rates borne by AHI during 2007-2016.
- Cost of capital (Ke) is calculated from capital asset pricing model (CAPM) with the following variable factors:
Ke = Rf + B (Rm- Rf)
Since there are no medical care establishments listed on the exchange in the Philippines, we have adopted the average B of those peer companies listed on the exchanges in Hong Kong, Thailand, Singapore and Malaysia.
Whereas:
|
Country |
BIL |
AHI |
BHD |
|
Thailand |
The Philippines |
UAE | |
| Rf Risk free rate |
5.12% |
6.53% |
9.97% |
|
Source: 15-year Source: Bloomberg Source: Bloomberg | |||
| Rm Rate of return on investment in the stock exchange |
10.46% |
13.21% |
9.97% |
| Source :15-Years Source: Bloomberg Source: Bloomberg average rate of return on investment in the SET | |||
| B (Beta)The volatility between the rate of return on investment in the stock exchange and the share price of the business listed |
0.84 |
0.73 |
0.73 |
| Source:Based on business value as BIL is a non-listed company |
Source: As healthcare establishments in the Philippines are not listed on the stock exchange,the IFA thus refers to average B of healthcare establishments that are listed on stock exchanges in Hong Kong,Thailand, Singapore and Malaysia. |
Source :Based in on the average B of healthcare establishments that are on stock exchanges in Hong Kong, Thailand, Singapore and Malaysia. | |
| Ke Cost of capital |
10.57%1/ |
12.55%1/ |
12.242/ |
|
Note: 1/ Both BIL and AHI are not listed on the stock exchange, the IFA thus adjusts upward the cost of capital (Ke) by 10% on the figure derived from the above calculation to compensate for such non-listing risk. 2/ Since BHD hospital is still under construction and expected to complete and become operative by early 2009, some certainties do exist in terms of construction cost overrun, construction delay, etc. The IFA therefore adjusts upward the cost of capital (Ke) by 20% to compensate for such risk. | |||
From the data and assumptions shown in the table above, the share price of BIL derived by this approach will be Bt. 144.62 per share. We have also carried out a sensitivity analysis by having the discount rate increase/decrease by 10%. BIL's share price comes out in a range of Bt. 132.21 -Bt. 160.25 per share.
Opinion of the IFA on the share price
The table below exhibits the comparison of share prices from various approaches:
|
Valuation method (Unit: Bt. per share) |
Offering price (1) |
Valuation price (2) |
Offering price higher (lower) than valuation price (1) - (2) |
%higher (lower) than valuation price (1) - (2) |
| 1. Book value |
153.52 |
88.66 |
(64.86) |
(42.25) |
| 2.Adjusted book value |
153.52 |
124.04 |
(29.48) |
(19.20) |
| 3.Price to book value |
153.52 |
166.55 - 204.27 |
13.03 - 50.75 |
8.49 - 33.06 |
| 4.Market value |
153.52 |
N.A. |
N.A. |
N.A. |
| 5.Price to earnings ratio |
153.52 |
27.32 -33.59 |
(126.20)-(119.93) |
(82.21-(78.12) |
| 6.Discounted cash flow |
153.52 |
132.21-160.25 |
(21.31)-6.73 |
(13.88)-4.38 |
The above table shows that the share prices derived from the book value, the adjusted book value and the price to book value approaches reflect the share value on any single day of the business and only the asset value in the past, without taking into account the economic and competition conditions in the future. These approaches do not reflect the real value of BIL as they do not capture the capability of BIL to generate future earnings and cash flow.
The price to earnings ratio approach reflects BIL's profitability for only 1-year period without taking into account its future profitability.
Viewing the above limitations, we consider the discounted cash flow approach the most appropriate for BIL share valuation, as it reflects the real share value taking into account its future cash flows under the assumption that encompasses future business prospects.
By the discounted cash flow approach, BIL's share price is Bt. 144.62 per share, which is lower than the offer price of Bt. 153.52 per share by Bt. 8.90 per share or 5.79%. Moreover, the said price in within the valuated min-max price range of Bt. 132.21- 160.25 per share, which is lower than the offer price of Bt. 153.52 per share by Bt. (21.31) per share or (13.88)% and higher by Bt. 6.73 per share or 4.38% only.
We therefore consider that the price of BIL's new ordinary shares to be issued in future and for which BH will waive the subscription rights to AFH, its connected party, is appropriate and is the same price offered previously to other investors.
3.2 Appropriateness of transaction conditions
BIL may in the future have to raise its capital substantially from time to time to fund its investments. As regards the rights offer by BIL in a maximum amount of 7,282,908 shares to its existing shareholders at Bt. 153.52 per share, BH Board of Directors has resolved for the Company to waive the future subscription rights to a maximum of 3,714,283 BIL shares in order for AFH to take up those shares at Bt. 153.52 per share, which is the same price as that offered by BIL to outside parties in 2006. Thus, we consider the said price reasonable and fair and the transaction conditions appropriate, as follows:
1) AFH must obtain its board of directors' approval for this transaction. AFH has informed that the transaction was already approved by its Investment Committee, which was appointed by its Board of Directors, and the Investment Committee has already notified the Executive Committee and the Board of Directors of such matter.
2) BH, AFH and BIL's existing shareholders are in the process of amending all agreements relevant to the transaction, comprising the Shareholders Agreement and the Share Subscription Agreement where it is concerned with the entrance of AFH as BIL's shareholder, with the agreement signing expected within 90 days from the date of BH Board of Director meeting's approval of the transaction.
3) BH shareholders' meeting must approve the transaction with a vote of at least three-fourths of the total number of votes of the shareholders present at the meeting and having voting rights, excluding the shareholders with vested interest.
4) BH, AFH and BIL's existing shareholders must obtain all regulatory approvals or permissions pertaining to the transaction. That is BH, AFH and BIL's existing shareholders must complete their respective corporate approval process before conducting this transaction.
4. Conclusion of the IFA's opinion
The waiver of future subscription rights to a maximum of 3,714,283 new ordinary shares of BIL at Bt. 153.52 per share will help lessen the Company's investment risk, considering that, unlike the Company, BIL has concentrated its investments in international hospital facilities, whose risk profile will vary with the business nature in each country. This transaction will also help minimize the Company's investment burden and the impacts on its financial status, when compared with the impacts that may arise if it maintains its 51.00% stake in BIL.
Such future rights waiver by BH to allow for AFH, its connected party, to take up the new shares will enable BIL's business to flourish with the use of AFH's connections in China, Taiwan and Hong Kong, i.e. AFH's life insurance business may help considerably expand BIL's customer base. The transaction will also help to boost BIL's investment opportunity since AFH is a financially strong investor with profound understanding of investment risks.
In addition, the Company has already planned for substantial capital expenditures to expand and refurbish the flagship facility in Bangkok, which will be primarily funded by internal cash flows and bank loans. Any efforts in expanding international investments could crowd out this local investment plan due to the Company's funding limitations. At the same time, investments in overseas facilities also are risky. As a result, we consider that the offering price of Bt. 153.52 per share which is the same price as BIL offered to BBL, V-Science and Istithmar, at which BH will waive its future rights to a maximum 3,714,283 new BIL shares to allow for AFH to subscribe for the shares, is reasonable.
We therefore recommend that the shareholders of the Company vote in favor of the said connected transaction on grounds that the transaction is considered reasonable and its price and conditions fair.
In providing our opinion, we have studied and analyzed the data available from the Company's management, comprising the resolution of the Board of Directors meeting no. 1/2550 held on January 29, 2007, the information notified by BH to the SET on January 30, 2007, the audited financial statements of BIL and AHI in the past three years of 2003-2005 and the internal nine-month financial statements for January-September 2006, the financial projections of BIL and AHI, relevant information and documents supplied by the Company, interviews with the Company's executives, and the information disclosed to the public.
Our opinion is based on the assumption that the information and documents obtained from the Company and the interviews with its executives are true and correct and with the current economic condition and the information prevailing at the time of this study taken into account. Therefore, any material change in the said factors may affect the opinion given herein.
Yours sincerely,
Advisory Plus Co., Ltd.
Prasert Patradhilok
(Prasert Patradhilok)
President
The financial projection and the assumptions used for preparing the financial projection have been prepared by the Company and its financial advisor by taking into account of historical performance, business competition, future's business policy and the company's experience in medical and healthcare business.
Asian Hospital Inc. (AHI)
Key assumptions used for the financial projection are as follows:
AHI's financial highlights for 2006
(Unit: Bt. million)
|
Items |
Jan- Sep 2006 |
| Accounts receivable |
98.32 |
| Current assets |
431.50 |
| Total assets |
2,506.24 |
| Total liabilities |
1,320.19 |
| Shareholders |
1,624.73 |
| Total revenues |
694.35 |
| Total expenses |
632.07 |
| Profit before interest and tax |
62.28 |
| Net profit |
(49.92) |
1. Foreign exchange rate
It is set at Peso 1 for Bt. 0.73, based on the average rate in the past one year (February 2006 - January 2007).2. Daily patient bed utilization rate
In 2006, AHI's patient bed utilization rate was 159 beds/day, up by from by 6% from 150 beds/day in 2005. This rate is therefore set to grow in 2007 by the same rate of 6% as in 2006, and from 2008 and so on, the rate is set to be 4 - 5 % which is about the same rate as it used to be by giving the rate as 5% in 2008 - 2009 because the occupancy rate will be 75% which is about to reach the maximum rate at 80% and giving the rate at 4% in 2010 - 2011 because the occupancy rate will reach the maximum at 80% . Beyond this rate, the quality of service will drop.3. Inpatient occupancy rate
Inpatient occupancy was 3.62 days/visit in 2005 and 3.4 days/visit in 2006. To allow for a greater turnover and serve a growing number of patients, this rate is projected to be 3.3 days/visit/person in 2007 and 3.2 days/visit/person from 2008 to 2016.4. Daily inpatient service income
Daily inpatient service income was Peso 15,101 in 2005 and projected to be Peso 17,743 in 2006. As AHI will adjust the service fee upward in 2007, this income thus is set to rise to Peso 21,454 in 2007 and expected to grow 4.00%, which is about the inflation rate of the Philippines, over 2008-2016.5. Daily outpatient turnover
The average outpatient turnover amounted to 237 persons/day in 2005 and 342 persons/day in 2006, representing a growth rate of 6%. It is therefore estimated to rise by the same rate of 6% as in 2006 to 362 persons/day in 2007. To be consistent on the assumption in 2, this item is projected to grow 5% in 2008-2009, 4% in 2010-2011, and to remain constant from 2012 to 2016.6. Outpatient service income
Outpatient service income was Peso 2,757/day in 2005 and Peso 3,047/day in 2006. It is projected to be Peso 3,169/day in 2007 and to increase 4%, which is about the inflation rate of the Philippines, annually during 2008-2016.7. Other income
Other income accounted for Peso 18.98 million in 2005 and Peso 23.82 million in 2006. It is projected to remain constant at Peso 16.3 million/year over 2007-2016.8. Cost of treatment materials and medical equipment
Cost of treatment materials and medical equipment made up 69% of medical service income in 2005 and 58% in 2006. Since the Company invested in AHI in 2005, the Company has improved BIL's internal management to be more efficiency which causing such cost tends to decrease as shown in 2006 that it was 58%, decreased from 69% in 2005. Therefore, it is expected to be 55% in 2007, 54% in 2008, 53% in 2009, 51% in 2010, and 50% over 2011-2016.9. Administrative expense, salary, management service fee and others
Since the Company invested in AHI in 2005, the Company has improved BIL's internal management to be more efficiency which causing such cost tends to decrease as shown in 2006 that it was 20.62%, decreased from 21.47% in 2005. Therefore, it is projected to be 21% in 2007-2008, 20% in 2009, and 16% - 17% during 2010-2016.10. Cost of investment in land, buildings and equipment
The Company projects cost of investment in medical equipment at an average of Peso 50 million - 100 million per year during 2007-2016.11. Working capital
Average accounts receivable 60 days
Average inventories 34 days
Average accounts payable 100 - 170 days
12. Terminal value growth
It is set to grow at 3.00% per year.
Bumrungrad Hospital Dubai (BHD)
This projection has been made based on the assumption that BHD becomes operational in early 2009.
1. Exchange rate
AED 1 (UAE currency) is equal to Bt. 10.23.USD 1 is Bt. 37.57.
The exchange rates above are based on the average rate in the past one year (February 2006- January 2007).
2. Daily patient bed utilization rate
Since 2009 will be the first year of operation, the daily patient bed utilization rate is set to be 31 beds/day in this year, and will jump by 97% to 61 beds/day in 2010 when BHD will become more recognized and then rise to 66 beds/day in 2011, 75 beds/day in 2012, 78 beds/day in 2013, 81 beds/day in 2014, 84 beds/day in 2015, and 87 beds/day in 2016.3. Inpatient occupancy rate
Inpatient occupancy rate is estimated to be constant at 3.2 days/visit during 2009-2016 because the Company considers this as the most viable rate, based on its own experience.4. Daily inpatient service income
Daily inpatient service income will be AED 5,280 in 2009 as this is the first year of operation and significant price increase will not be made. The income will thus grow by 5% annually to AED 7,429/day.5. Daily outpatient turnover
Considering that 2009 will be the first year of operation, the daily outpatient turnover is projected at 123 persons in this year. When BHD gains more recognition in 2010, this number will mount by 95% to 240 persons, and further to 261 persons in 2011, 295 persons in 2012, 309 persons in 2013, 319 persons in 2014, 328 persons in 2015, and 338 persons in 2016.6. Outpatient service income per visit
This item is forecast to be AED 798/day in 2009 when BHD will have just begun operation and no significant price increase will be made. It will grow by 5% per year to AED 1,122/day.7. Cost of treatment materials and medical equipment
This item is set to be 48% of medical service income in 2009, 42% in 2010, 41% in 2011, 40% in 2012 and 2013, and 39% in 2014-2016.8. Administrative expense, salary, management service fee and others
This item is projected to be 48% of medical service income in 2009, 30% in 2010, 34% in 2011, and 32% -33% over 2012-2016.9. Cost of investment, buildings and equipment
This item will be AED 4.9 million in 2009, AED 6.9 million in 2010, AED7.2 million in 2011, AED 2.3 million in 2012, AED 4.7 million in 2013, AED
7.9 million in 2014, AED 15 million in 2015, and AED 22.5 million in 2016.
10. Working capital
Average accounts receivable 65 days
Average inventories 65 - 70 days
Average accounts payable 60 days
11. Terminal value growth
Terminal value growth will be 3.00% per year.
Bumrungrad International Co., Ltd. (BIL)
Key assumptions used for the financial projection are as follows:
1. Management service income
This is divided into two portions. Portion 1 is set to remain constant at USD 120,000/ year for AHI and USD 250,000/ year for BHD. Portion 2 is set to depend on AHI's performance, projected to be Bt. 51 million in 2007, Bt. 54.8 million in 2008, and Bt. 54.9 million in 2009.2. Software patent fee income
This is projected at Bt. 9.0 million in 2007, Bt. 7.67 million a year during 2008-2010, and Bt. 1.92 million in 2011.3. Operating expense
Operating expense is expected at Bt. 53.25 million in 2007, Bt. 36.87 million in 2008, and in a range of Bt. 22.23 million - 32.45 million over 2009-2016.4. Working capital
Average accounts receivable 90 days
Average accounts payable 30 days