Ladies and gentlemen, good afternoon and welcome to the third quarter and nine months 2022 financial results of IHH Healthcare analyst briefing conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question and answer session.
At which time, if you wish to ask a question, you need to press star one one on your telephone keypad. I must advise you that this conference is being recorded today, 13th 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, thank you for joining us today. I'm Penelope Koh from IHH Investor Relations. Welcome to joining us for our quarter three 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. Then we'll have Joerg share more on our financial performance. Thereafter, Dr. Loh will continue with the operational highlights before wrapping up the session. Shortly thereafter, we'll move to Q&A. 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 four, just a quick snapshot of our current operational highlights, in Q3. Moving to slide five, you see here our financials for Q3 2022. I'm pleased that as we enter the post-COVID phase, you remember that in Q2, I called that our COVID inflection quarter. 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 profits decreased by 54%. 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.
Jörg will take you through those numbers in more detail shortly. If you turn with me now to slide six, you'll see the performance for 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's held steady since the latter half of 2020. I'll pass the call to Joerg to walk through the financial highlights.
Thanks a lot. Thanks a lot, Kelvin. I guess a lot has happened in our books in Q3. I think you saw some announcement. We wanna talk about that a little bit later on China. Look, let me get started. Revenue growth, 3% year-over-year. More local and foreign patients returned. Look, we have shown sequential improvement, quarter-over-quarter and year-over-year over the last two years. We see despite COVID trough in many other markets, for IHH, we have not seen any of these revenue reductions. On the contrary, we are now much stronger than pre-COVID. Revenues far exceed 2019 revenue and earnings levels.
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 in 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. We have a weaker lira, so the great contributions from Turkey and Europe have come in a little bit weaker. We also see a little bit of a desynchronization on price adjustments in Turkey. I think the major message, if we look into Turkey, and I'm sure Kelvin is gonna talk about that later.
If you look at the Ataşehir 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, a cash breakeven 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. 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. India is doing really well. Singapore is holding up very strongly. We're actually quite satisfied with the underlying performance once you strip out these overlays primarily from MFRS 129. Of course, look, this drop in net income of 54% reported looks like really scary.
I think we need to 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, that gain is no longer happening this year. There is automatically a drop in the reported income.
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. With a net gearing now of 0.27, 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 you go to the next page 6, we've prepared this to explain a little bit the movement.
We started a year ago with MYR 550 million in net income in Q3 2021. 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 revaluation. 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. We have some interest increases through these inflationary and interest higher interest rate environment. Then you see a couple of steps for improvement, which is, 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 US 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. Comes this major drop down, MYR 259. That is this drop-off primarily of this deferred tax asset that we no longer have in our books. We have some net FX losses. We have a positive effect on an impairment that we did, and we have some other extraordinary items.
That leaves us at a PATMI ex MFRS 129 of MYR 338. You see, if you look at this journey, the major drop, is actually caused by this one-time item that we had last year. If you eliminate that, we are basically increasing our underlying net net income. You have three 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. I think, we recommend all the analysts to look at this analytical journey a little bit more carefully.
Underlying earnings, I think this is when 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. This has increased to MYR 374. That's I think 6% increase. That is a little bit how we look at our business, to really focus back on operations.
Look at, number one, quite a nice growth on the revenue. Number two, underlying Net Operating Income is improving by 6%. 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.
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 do 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.
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 our prices quite aggressively, of course, we need to look at the quarterly sequential development. On top of this, we see, of course, an impact here out of Ataşehir.
With all the costs, all the ramp-up costs of that new hospital in our books in Q3. In Q3, I think we've achieved 3% or 4% EBITDA in that hospital in a couple of weeks only. All the pre-opening costs 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. 23% out of the Turkish and European perimeter. Let's quickly go into MFRS 129. We had guided to this page, I think last time. We have five effects. One, balance sheet restatement. We have year to date balance sheet reindex MYR 2.8 billion.
In Q3, it was actually not as much of a difference. We have reindexed 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 year, quarter end, FX rates, while before 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. There's no impairment planned. If we move to the debt development, we have an increase in. A strong increase in our EBITDAs, and this is from 1st of January to Q3. We have a strong EBITDA. We have capital expenditure. Ataşehir went online.
We had some acquisitions in Japan and the P Life 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 on net income numbers. 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. With that, I'll pass back to Kelvin to talk about the operational highlights.
Thanks, Joerg. On slide 17, you can see here, our inpatient admission figures. The movement from Q3 2021 to Q3 2022 in terms of volumes, in the different countries really, is still the effect ofWhether those countries had significant COVID volumes or not before. You can see here the Malaysia growth is strong, because they didn't have COVID patients.
Singapore more flat-ish 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 that 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 the last year now converting now to higher case mix acuity as well as foreign patients in Singapore, hence revenue intensity increasing.
In Turkey, that revenue intensity is, of course, in a significant part due to price adjustments following that high inflation economy. 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 since COVID reopening. Revenue increased by 18% over the same quarter last year.
EBITDA grew by 24% to MYR 248 million. The EBITDA margins are now close to 3%. Moving to slide 20. Here, for Singapore, revenue decreased 3% to MYR 1.3 billion. Again, this is because of that significant COVID-19 melt off, both inpatient as well as lab testing compared to the year ago. That's offset by the recovery of both domestic and foreign patients. Foreign patients now make up 17% of the entire IHH Singapore revenues. In fact, almost 25% of the Singapore hospital revenues. EBITDA also grew 3% to MYR 375 million, and the margin Q3 is at 29% EBITDA margin.
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 growth volume rebound or growth would have been stronger. Going on to slide 22.
For Turkey and European operations, revenue increased 1%. EBITDA dropped 23%. There were translation effects here, and there were also start-up costs of Acibadem Ataşehir Hospital, the new Greenview Hospital in September, and of course, higher energy costs as well. Revenue intensity is high, as I explained, because of the necessary price adjustments.
In slide 23, you can see non-lira contributions now make up 46% of Acibadem's revenue. With almost 15% came from foreign medical travelers to Turkey and 31% came from European operations. You can turn with me now to slide 26. For India, there's healthy recovery of inpatient admissions for across our India operations, including both Fortis and Global Hospitals.
As a result, revenue increased 6% and EBITDA, there was 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. 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%. We also saw that sustained positive EBITDA for the quarter. Average occupancy is now 64% of the 230 beds that are now operating compared to the 198 beds in Q3 2021. 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. Now lab business on slide 29. For Q3 2022, our revenue for this segment was MYR 401 million, and EBITDA was at MYR 36 million. Although revenue declined 31%, this is really off a very large base due to COVID-19 services through this year.
It's encouraging, we are happy to see now that business as usual or non-COVID revenues is growing at 8% year on year. You can see here now starting to compensate for that melt off in COVID services. As I close with slide 33 on our outlook, we do expect that inpatient volumes and bed occupancy to continue to grow in this post-COVID phase for IHH.
The healthcare 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 inflation pressures include energy prices and of course interest rates are rising.
I wanna call out to China, we do expect challenges, operating challenges in China. 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 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're well-focused on our Care. For Good. strategy. We are focused on our growth via our cluster strategies that Grace had mentioned, continuing that growth trajectory while driving up our return on equity.
For both our hospital segment and our laboratory segments as well. We are confident to ride out these short-term challenges, and we are confident that we'll deliver long-term growth for our stakeholders. With that, thank you so much. We'll now take your questions. Penny, please.
Hello. Before we start, we'll first take questions from the participant on the call before moving to the questions, from the webcast participants. I would like to request each participant to keep to three questions, and then thereafter you may rejoin the queue after. With that, operator, please proceed with the Q&A. Thank you.
Certainly. As a reminder, if you'd like to ask questions, please press star one one on your telephone and wait for your name to be announced. One moment for the first question. Have the first question from the line, Nicole Goh from UBS. Please proceed.
Thanks very much. Hi, Dr. Loh, Joerg, and Penny. Just wanted to find out about I think earlier this year, I think you kind of guided that with the cost increases in both Singapore and Turkey, there were gonna be some price adjustments that will be made. 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.
Thanks, Nicole. Singapore took the price increases at the beginning of the year. That has probably some lag to that inflation. If people look towards doing something as we enter into the new year. Turkey also, I think the same effect, you know, we had put through a order of 35% price increase beginning of the year. We did so another round in the second half. Each round I think, there was indeed some lag compared to that high inflation situation. We look forward to doing the another round again at the beginning of the new year.
Just to clarify, so in Singapore, there was only one time, right, this year? That's what you're saying, at the beginning of the year.
There is the one 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. Would you be able to share like the rough magnitude in Singapore?
I think the percentages, you know, inflation in Singapore, we are talking single digits. This is not a double-digit price adjustment. It's roughly pari passu with inflation, as I said.
I think it's a bit.
Okay, got it.
I think it's a bit too simplified to think that on thousands of line items, you would then apply one 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 wanna overburden patients. It's more like a blended approach. As Kelvin said, The intention is to offset inflationary trends.
Sure. Thanks. My second question with regards to the bed closure, 'cause I think, Joerg, you mentioned just now that because of the labor shortage, you were not able to open all the beds in Singapore. What proportion of your beds are currently closed still in Singapore? Any sort of timeline that we can look to for it to open?
Nicole, yeah, 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 six months, we should look towards resolving this. We review that the staffing constraint does not become, does not constrain our ability to serve these patients.
Okay. Got it. Sorry, one 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. Can you remind us again, what was it pre-COVID? Was it 25% of hospital revenue? We're back to pre-COVID levels already?
Yeah. It's back to pre-COVID %.
Okay. It's by and large, yeah.
The volumes have.
compared
fully back to where it was.
Okay. In terms of percetage, revenue is back to pre-COVID levels?
Yes. That's correct.
All right. Okay. Thank you.
Thank you for the question. As a reminder to ask question, you may press star one one. Our next question comes from Rachel Tan of DBS. Please proceed.
Hey. Hi, good afternoon, Dr. Loh, Joerg, and Penny. Thanks for doing this call and taking my questions. My first question is to follow up on Singapore. I understand that there's inflationary pressures and also labor shortages. Just wondering in terms of margins-wise, if you're factoring, you know, potential price adjustments next year and, you know, you'll probably get your labor shortage back again. Would you be able to bring your margins for Singapore back to above 30%? Likewise, for Turkey with the hyperinflation, 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. I think let's not get ahead of ourselves. We do not expect those margins to slide further for Singapore. Either we hold it there or with some price adjustments, some volume growth. There are still inflationary pressures. Maybe there's some upside. Turkey too, we are trying to catch up with the inflationary pressures through a relevant price adjustments as we turn the year.
Okay. Got it. maybe just to follow up on this. In terms of, the demand that you're seeing, I presume there are some, like, pent-up demand because of COVID and now that we have reopened. Do you expect this, strong pent-up demand to be able to come through, for the rest of, 2023 coming year?
Yeah. I'm not sure if you're painting the picture as a pent-up demand. The healthcare effect... I mean, the reopening and the COVID situation of constraining sick patients, that has been quite a while now. I wouldn't go as far as say there's pent-up demand.
I just see it as a continued recovery as patients get confident, softer smaller electives, less sick patients also come to hospital because they don't defer those. It's not a pent-up in the sense that there's a sudden release and then it falls off. We do expect that there's continued growth post-COVID, number one. Number two, continued growth simply because of our strong brands and the whole rising of demand.
Okay. Got it.
And, and, and please-
My second question is.
please also-
On the 2023 targets. Sorry.
If you look into 2023.
Okay. My bad.
I think.
Yeah
... also made quite clear that one of the growth drivers is, of course, opening of new beds. 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. 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. Thanks, Joerg. Maybe do you 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.
Joerg, do you wanna take the next question or you wait for Kelvin to come back?
Yeah. look, we, what we have.
Okay.
What we have, I'm taking over from Kelvin here for a minute. Look, 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 next fiscal year. We are working on that. If you look at Turkey, we've just acquired 52 beds in Ortopedia Hospital. We've opened Ataşehir with 280 beds. We have Kartal that we plan to open in 2023. If you look at India, in Fortis alone, we have around 1,500 beds that we plan to open in the next three years.
Look, 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. We are participating.
Deals need to be reasonable, of course. If you look at the growth potential from where we're 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've, we presented a very strong budget in 2023.
Look, I, 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. If I remember correctly, when you hedged the debt, non-Turkish lira debt For the Turkey operations, there were some swaps involved. I just wanted to know, when are the swaps expiring? Given the Turkish lira depreciation, how would that impact if once the swaps expire?
Look, we are doing a mark-to-market on all these swaps. The swaps are basically tied to expiration of the respective debt. We are 100% hedged, except for this one rental contract,
Maslak
in Maslak.
Maslak
...in Istanbul. That's a drag. We have not hedged that. All the rest is basically hedged. It's hedged to maturity. As we go through a mark-to-market every quarter, you see these profits coming through every quarter. Well, with the respective markdowns on the on the liability side, balancing that. You'll not... When these loans are due and we go into these hedges, you will not see any extraordinary effect on our books.
The duration of the swaps, to which year is remaining?
Really, tied to the loans. Tied to the loans. I. There are many different loans. I have here a list of all the. There's this, there's a seven-year loan that has a hedge attached to it. There's some are 2028, some are 2025, some are due next year. It's really a mixed bag, and our hedges are tied to the loan directly.
Okay. Got it. Yeah. Can I just squeeze in one last question, just on the Chinese divestment? Just want to try to understand, would you use the same kind of divestment structure to your Shanghai hospital? Given that, you know, the investments to Chengdu and also Shanghai is different, right, would you consider the same kind of divestment structure?
Yeah. Thanks for that. 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. 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.
Okay. All right. Okay. Thanks. Thanks. Thanks so much, Kelvin.
Thanks, Rachel.
Thank you for the questions. One moment for the next questions. We have the next questions from Divya Gangahar from Morgan Stanley. Please proceed.
Thank you. Good afternoon. Just a couple of follow-ups on Singapore and Turkey. Just on Singapore, can I understand exactly how the nursing shortage is being resolved? You know, like, how do we get the confidence that we should be able to address this issue in the next six months?
Thanks for that. 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 who come in from outside of Singapore sources and of course, they need to get their work passes and so on. That may take 3-6 months, but there is that pipeline.
Secondly, we are rapidly redesigning job scopes in a market like Singapore where we face such constraints. For example, we are building up a pool of staff called patient care associates, which then help out. That reduces the nurse's tasks so that they can operate at top of their license.
Which means that this patient care associates remove tasks which are not, which are non-nurse, license requiring. Therefore, the nurses can really focus on acute nursing work. Of course, we look for other ways to automate the processes, improve their workload environment. We are confident, we will resolve this.
Right.
It is a temporal situation caused by a very rapid reopening in Singapore. It's not just us in the healthcare sector. I think it's faced by the entire healthcare sector. In fact, it's faced by the entire service sector in Singapore.
Right. roughly speaking, what kind of, you know, wage or salary hikes are you seeing compared to what it was in 2019 for the medical staff?
Yeah. We are 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.
Right. I mean, is it like twenty-.
We do all that's necessary to.
Right. I mean, is it like 20, 30% above 2019 levels? 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 our pricing, adjustments? I don't think it will as we get into 2023.
Okay. Fair enough. A similar question for Turkey. just, you know, I mean, this quarter we've also seen the volumes or the inpatient admissions actually lower. I mean, after, you know, four, five quarters of growth, we've actually seen that decrease. The margins are also probably, you know, amongst the lowest in the last few quarters. Is there some sort of a demand slowdown as well in Turkey, and that's why you're not taking, you know, price hikes in line with inflation?
Price hikes, I think we have to watch that space carefully. Find that really right balance between in passing on inflationary pressures, and of course, being conscious we provide the best value. There is a seasonal effect in Q3. There were quite a few more days of public holidays, summer holidays, compared to before.
The occupancy, that plus the fact that we opened a new hospital, obviously a greenfield hospital, that's why you see what looks like a lower occupancy rate as well. That new hospital opening also contributed. Some seasonal effects and some one-off effect with the hospital reopening.
Got it. What would you reckon would be like a more sustainable margin for the Turkish business? I mean, it's ranged between 20%-28% in the last, you know, four quarters. It's a pretty wide range. Going into 2023, I mean, do you think it's in the low 20s or the mid-20s? Where do you think it settles?
Yeah, look, I think, I think the Turkish team has seen some margin depression from last year, from the high levels of 27%, 26%, 27%, 28%. I think there was expected to be somewhat of a normalization. We do have this effect of inflation. Don't forget the electricity prices, right?
We have electricity prices that probably cost us 2%, 3% EBITDA margin. I think, Look, what is the long-term range? I think the aspiration clearly is to get back to somewhere between 24% and 25%, closer to 25. I, I don't think that there's 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% or 25% is a safe bet.
Got it.
Again, I think the effect of opening a new hospital in Q3. A 280-bed hospital.
Got it. Got it. Yeah. Thank you.
Thank you for the question. One moment for the next question. We have the next question from the line of Amanda Foo from Credit Suisse. Please proceed.
Hi, good afternoon. Dr. Kelvin, Joerg and Penny, thanks for the call. 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. You know, would you mind sharing whether these levels, are they sustainable going forward? You know, what are the key drivers behind this improvement that we've seen as well? The first question.
Malaysia is doing well. Revenues are. The patient volumes are, been growing strongly. Bed occupancy is as high as it's been, higher than it was pre-COVID. Of course, the absolute throughput is helping. That's why you're seeing this higher margins in. Also, in Malaysia, a lot of work has been done to improve the case mix.
They've developed more sub-specialties, expanded the complex specialties with more complex care like cardiology and cancer. The case mix intensity is higher. 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. There is that counter effect. All said and done, could things remain at least this level, I absolutely think so.
Thank you. You know, related to Malaysia, I was wondering, have you seen any return of foreign patients?
Yes.
....contribution, if so, and, you know, 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 they 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 for Prince Court, Gleneagles Kuala Lumpur, and Pantai Hospital Kuala Lumpur.
Thanks. 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?
Yeah. I think it's roughly about 4% of the revenue, of the Malaysian revenue currently.
Okay.
Mm-hmm.
And for India, where do we stand right now?
India is, pretty close to pre-COVID, era, probably in the 8%-10% magnitude.
Right.
Okay. Thank you. Moving on, obviously, you know, right now we find ourselves in a rising interest rate environment. You know, I was wondering how does that impact IHH? Yes, you know, we have seen the conversion of perpetuals back to real debt, so obviously net financing costs does go up. Does this rising interest rate environment also impact IHH's financing costs? At the same time, you know, is there a rough proportion of fixed versus floating debt that you can share with us?
Yeah. Look, of course there is an impact. We have average cost of debt that is still probably around a 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. Our debt is affected by shareholder loans in Hong Kong. We're trying to look into that situation.
Look, there's no question. If we look at Q1 2022, we had 2.8% cost of debt. We have now 3.3% cost of debt, so it does go up to some extent. Look, 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.
Thanks. 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. Our belief at this stage is that floating rates are still more attractive as they attract a lower coupon.
Thanks, Joerg. One last question. On Fortis. Could you provide us with an update on the mandatory takeover offer? Is there any timeline that you can share? You know, could there be plans to revise the offer price?
Yeah. Look, yeah. 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 have with SEBI. There is a desire by SEBI that further clarification from the Delhi High Court is sought after. We are in the process in discussing with SEBI how to exactly do this.
Look, putting time pressure on people in this environment is also not usually seen as being helpful, so we really wanna be respectful of Delhi High Court, to SEBI. We will talk to them. 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.
Yeah.
....despite that, MPO situation that has gone through, we can see that, business is growing strength to strength. Revenue has grown strongly, bed occupancy is probably at all-time highs. So is EBITDA margins. We expect that, growth and continued productivity to actually continue.
Yeah. That's precisely the case, right? You know, I guess the market is also, you know, curious whether is this an opportunity for IHH to increase their stake as, you know, especially for the reasons that you just pointed out, it's doing very well. If you look at the original offer price versus where it's trading today, there is quite a gap. Yeah. That was just something I was trying to find out, if you could share that at all.
Look, 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 five years.
Understood. Thank you very much. That's all from me. Thanks, Amanda.
Thank you for the questions. One moment for the next questions from the line. We got Oong Chun Song from RHB Group. Please proceed with your questions.
Hi. Thanks management for organizing the call. I have three 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 the account of net monetary loss resulting from the MFRS 129. Could management actually share what are the key mitigation plan IHH is planning to do in the coming quarters? What is your margin expectation for your Turkey operation moving forward?
This effect that you're seeing for the last maybe two, three 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 there's found some seasonal effect in Q3.
Secondly, the big thing that has happened over the last one year in Turkey is very high inflation, right? There is a price lag. There is a pricing lag because there isn't that 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. That's, we've done. We did that in the beginning of the year.
We did that second half of the year. It's true, there was some lag. We try to catch up on that as we go forward. We are hopeful that that same massive inflation that we saw through that year won't happen, won't keep happening. Secondly, as we grow volumes, we expand the business, we should try to compensate for these effects as Turkey has always done for many years of its operations.
Thanks. I think...
The other piece I think that you'll be able to see is the just to add on, is the foreign revenues, right? The non-lira revenues, which now stands at 46%. That is a very strong support base, which does compensate for translation effects on the lira. That's still growing as well.
Can I also get a sense in terms of the nature of the net monetary loss being recorded during this quarter? 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. You know, can we look from this point of view that this negative monetary loss is some kind of a reversal which may indicate the Turkey inflation was not as high as the previous quarter?
That's an interesting one. Actually not really. I think there are two effects, right? One effect is you take Turkish lira and you go through your revaluations. Then in Q3 alone, that revaluation in Turkish lira was around, if you convert it at same currency rates, like MYR 10 million plus. There was a positive effect. Unfortunately, in hyperinflation accounting, you need to take quarter-end exchange rates for your hyperinflation entries. The difference between average Q3 X rates and quarter-end X rates turned that gain into a loss. The loss is actually not a loss. It's only a translation effect from Turkish lira into ringgit.
It's a bit technical, and look that just is a revolving change. The monetary gain or loss was in fact a gain in Turkish books. 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, that's how mathematically it works.
Sure. very clear. Thanks, Mr. Joerg. I think, my last question will be on what are 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 partnership or any other measures that IHH could share with us?
Absolutely. 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. I 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 are probably order of maybe two to 80% there. As we said, there are probably some supply constraints on the supply side as well. What can we do more going forward? Yes, the traditional markets and cities that do come into respective countries will drive growth, further partnerships, expand channels.
There are also new markets, right? Second-tier cities, which maybe here though had lesser medical travel, but now is ready for it, so we'll expand into those areas as well. 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 insurance, private insurance schemes that actually allows our patients for foreign travel.
That's growing very rapidly, so we're tapping to that as well. Finally, of course, and most importantly, we deepen our specialization, maintain that edge that we always have in our respective markets, whether it is Turkey from that medical tourists from those region, Malaysia and Singapore, medical tourists from Southeast Asia and Asian region.
Deepening our clinical capabilities, and having that, maintaining the cutting edge, I think is super important. In Singapore, for example, we are due to open our Proton Therapy Centre pretty soon, certainly in the first one, two months. Hopefully, in the first one, two months of the new year.
Shall we, shall we quickly move through the questions, on-?
On the webcast.
On the ticker here. Weiquan, check on this update, mandatory offer. I think we've answered that. We are trying to get through SEBI on how we can relaunch this. The request is to ask High Court of Delhi, and we are figuring out exactly who needs to ask and how does this need to be asked. Our view is, of course, the stay order is 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. 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, do you wanna look at that?
I think the question was around growth going forward. Well, how do we drive growth, new hospitals, or otherwise?
Mm-hmm.
First of all, we still have some ways to fill beds. We come off Q3 now, still overall for the group, probably just slightly over 60% bed occupancy. Even on existing bed capacity, even on existing buildings, we can simply add more patients throughput. As I mentioned, we will then add beds to our current land that we have.
Next three years, 600-700 in Malaysia. Forty such capacity to add another 1,000 beds. In places where we are starting to max out, in clusters, we are starting to max out, then is greenfield possible? Absolutely, yes. Of course, greenfield meaning new hospitals that we build.
Of course, as mentioned before, we are on 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 Weiquan as well. Can we have more color on the agreement to divest Chengdu Hospital? What is the timeline and who is it with?
Look, we've, of course, agreed on confidentiality. I think it's a party we all know. I think we'll disclose more once closing happens. Timeline is next couple of months we try for closing.
The next question. Chen Tsun, 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?
The discussion is quite clear. I think people are aware of the interpretation and the Supreme Court order. Of course, we also wanna be compliant with the court and not be in contempt or held in contempt. Neither does SEBI wanna be held in contempt. 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 Kok Xiang. First one, can you share with us the major foreign patients country IHH Singapore is serving during pre-pandemic? Is it China? 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? How is the momentum of foreign patients returning to IHH Singapore in October and November versus Q2 and Q3? Dr. Loh, do you wanna take that?
Yeah. Thanks so much. Great, great question. First of all, that apparent re-reduction in admissions, I mean, not so much, it looks flattish maybe from Q3 2021 to 2022. But again, that's because we came off a base where there was a public-private partnership in 2021, right, where there was significant numbers of COVID-19 patients, not so acute, but filling up beds in the Singapore hospitals.
We come to Q3 2022, where that's basically zero or very, very few COVID patients, and that has been replaced by non-COVID patients, domestic as well as foreign patients. The foreign patients have rebounded very strongly. As I mentioned, it's probably at least at 80% pre-COVID levels. Which countries does it come from? North China has never been a major contributor of foreign patients.
The big markets for Singapore and medical travel are Indonesia, Malaysia, and then the Indochina region, Vietnam, Myanmar. We go further out a bit, Bangladesh, and then India. 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. As I said, we have to solve for our 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?
Yeah. actually, there were more holidays as well in Q3. When you look at that slide that we had around bed occupancies coming down. Firstly, because of the holidays, secondly, because the denominator is now bigger, right? Because we opened more beds as a result of Ataşehir, the new Ataşehir 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 is Seasonality-wise, it's actually, you know, people tend to go on holiday.
We saw a greater impact this time round 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? Sorry.
maybe.
Yeah.
Don't forget that this is the first year post-COVID in Europe. Europe holiday season is July, August. Yeah, that really is a traffic topic.
Yeah, exactly. Next question. What is the current nurse shortage as percentage of your total requirement in Singapore right now? Do you foresee spillover effects to other regions such as Malaysia?
We do know there is a supply constraint. It is very hard to estimate if we could resolve it all, what is the differential in revenues? Personally, I think easily another 10% of revenues or volumes could come in. Otherwise, now sort of backing up in a double queue. As we resolve of that, then the faster our growth will be in terms of the surgical treatment.
Okay.
Okay. There was a disturbance on the line, I think.
Okay. Yeah. Maybe we can quickly move on to the next question from Raman. Two questions. Can management please help to clarify why finance income for 3rd quarter 2022 is negative MYR 68 million versus a positive of MYR 125 million in Q2 of 2022? Also, what's the appropriate steady-state effective rate that we should assume for the group going for 2023 and beyond?
Yeah. I think in the finance income, there are a lot of different moving pieces in there. You have some of the revaluation cross-currency swaps. You have some effects out of hedging against the U.S. dollar and others. 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, 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 then from being hedged into redemption.
If I can add on to Joerg's point. Actually, Raman, you can refer to the, our interim finance, report on page 43. We actually give you a breakdown as to why that finance income is negative. It basically makes up of two item, which is then the interest income as well as the fair value lost on the financial instruments. Of which Joerg was mentioning about the swaps as well as some forward contracts that we have.
I mean, you can imagine that, with the cross-currency swaps that we have in Turkey at the moment, these create huge liabilities for the banks. With ongoing revaluation of the Turkish lira, these liabilities increase. 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 about.
Yeah.
Concerned about.
The second question about the steady-state effective tax rate that we should assume for the group for 2023 and beyond.
Yeah. I don't see that there's any change from where we are at the moment. I think, of course, you will have some entities that move into a more profitable situation. I think you have India. India's probability growing. You have a move towards a bit positive in Hong Kong, which at least we plan for end next year. I don't think that there's gonna be any structural changes.
Okay. 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? Do you wanna take that question?
Y-yeah.
Yes.
Thanks for that. There are some inflationary pressures. I think that's part of the effect. The other thing, too, is that as with most markets too, while prices, as well cost does go up on a continuous basis due to the inflation. Practicing adjustments, we can't do that on that continuous basis.
Just looking at it's not like it's super material, right? It's like minus 1%.
Yeah. It's relatively flat.
Yeah.
It's actually rather flat.
Mm-hmm.
Flat is not really a reduction. That's why I've got. Yeah.
Yeah. Okay. We'll move on quickly. Move on to the next question from Raymond. The first one, what was what was the losses in full year 2021 from 49% effective state in Gleneagles Chengdu hospital, and how much was the sales proceed from the 49% divestment?
Yeah. Look, let's close the deal first. Then we see on the disclosures around purchase price and what we do want to disclose. I think we're not at the 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. 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.
Yeah.
It's clearly a value accretive transaction for us.
Next question from Ferlin. 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. I think the primarily effect you have is, on the one hand, you have a continued impact on your laboratories business and our laboratories business. We have a complete falloff of the COVID favorabilities that we had from selling beds to government. You have basically hardly any COVID related services anymore to the market. I think these are the main drivers. Don't forget, we also have probably 1.5 points in higher utility costs, power or utility costs has increased in Singapore quite substantially as well. 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. We'll chat back to you offline. Next question is from Kok Xiang. Looking at the revenue intensity for Singapore year to date increased 24% year-on-year. By looking at the past five years, the growth range was between 5%-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?
Thanks so much. You're right. There's always, firstly a tidal growth in intensity, right? Aging population, newer technology. Singapore, of course, we always take pride in keeping things on a cutting edge. We keep launching new sub-specialization. That is what you typically would see as our increase in case mix every year, probably in a single digit region.
This relatively big effect we are seeing here is contributed by that change in patient pool that I talked about earlier. The melt off 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. Compared to previous year, foreign travel has come back in big force. Of course, foreign patients have a higher intensity, higher even than the domestic, surgical patients, because they're simply, sicker and more complex. Do we expect this, continued large uplifts? Not really. It probably come back to a sort of more normal pace that I talked about.
Okay. Thank you, Dr. Loh. I think, looking at the time, I think we've already answered a fair number of questions. With that, I would like to conclude the results call. Anything else you want to add?
Just 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. I think you should not be surprised that we are very cautious and prudent in our assessments around valuations in China. 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've basically, through the whole COVID period, have been able to show earnings growth and show top line growth. 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. We continue to work on that and continue on this path.
Okay. Dr. Loh, you have any other comments? If not, I'll wrap up the session.
Okay. Thanks so much. Thanks to everyone for participating. Again, I think this quarter's results, not easy one to understand, but it's good piece, with regards the growth in our core operating performance. Hope, the explanation and the session today was useful to all.
Thank you, Dr. Loh. Thank you, Joerg. With that, we'll now conclude the IHH Healthcare third quarter and nine months financial results briefing. Thank you for joining us again. If you have any questions, please contact us at ir@ihhhealthcare.com. With that, operator, we may disconnect.
Thank you.
Thank you.
Thank you everyone for participating. You may now disconnect your lines.