• Thai healthcare expenditure should accelerate along with an aging society and health insurance coverage; Thailand’s medical tourism industry will be driven by Chinese patients 
• Expect strong earnings in 4Q17 driven by higher SS payment rates and recovering international patient volume
• OVERWEIGHT; trading at attractive valuation of 34x FY18F PE and offers 14% earnings growth in FY18F

Revenue intensity should continue to grow

Healthcare expenditure in Thailand has increased by 5% p.a. CAGR over the last 10 years. The momentum will accelerate as Thailand enters an aging society. Health insurance premiums have increased by 13% p.a. in the last five years and should continue as government allows health insurance premiums (capped at Bt15k) to be tax deductible, effective 2017. The tax deduction will encourage individuals to buy more health insurance, which would lead to higher revenue intensity. In the medical tourism industry, Thai healthcare operators have benefited from the rising number of Chinese medical tourists. Although they are mainly low-intensity cases (health check-up, anti-ageing program), operators are trying to attract patients with more serious illnesses to increase revenue intensity in the long term.

BCH, VIBHA and CHG should report strong 4Q17 earnings

The near-term catalyst for the sector will be 4Q17 results. Mid-small cap hospitals should continue to enjoy higher rates from Social Security (SS) patients effective July 2017. For big cap hospitals, the impact of fewer Middle East patients should be lessening. Data suggest revenue from Middle East patients started to grow again in 3Q17. Thus, Middle East patients no longer drag operations, while Chinese patients will be the next revenue driver. In our coverage, BCH should deliver strongest earnings growth in 4Q17 (+41% yoy), followed by VIBHA (+17% yoy) and CHG (+13% yoy).

Opportunity to accumulate stocks; top pick is BCH

We maintain OVERWEIGHT on the Healthcare sector. The sector has underperformed the SET by 20% in the past year as investors are tilting towards high-beta stocks. We see this as an opportunity for catch-up play as the sector offers decent 14% earnings growth in FY18F and trading at 34x FY18F PE, the low level in the past three years. Our top pick is BCH as WMC’s operation is improving and should turn profitable by 2019, while SS revenue remains strong. We also like CHG for it improving EBITDA margin and VIBHA for its better group structure.