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Nov 15,2016 22:38:24

Indonesia Healthcare: CoB rescue

Coordination of Benefits + JKN = An industry game changer
At this stage, on the back of the government’s new National Healthcare Insurance Program (JKN) created by the Social Security Agency-Health (BPJS-Health), the Coordination of Benefits (CoB) is changing Indonesia’s healthcare landscape. While the COB is not new, its ability to now be combined with JKN (exhibit 21) and private insurers (exhibit 22) should benefit the industry. By subscribing to JKN, private insurance premiums can fall by up to 40%, creating a game changer, in our view. Hence, we upgrade our sector rating to OVERWEIGHT, from NEUTRAL.

Beneficiaries of BPJS participation: Hospitals, insurers, insurance users   
COBs can now offer patients and companies the access to better-quality medical services through cheaper premiums, but with similar flexibility compared to normal private insurances. From the perspective of insurance users, this can pave the way for higher productivity (exhibit 25-26) by using private medical providers (ie, clinics and hospitals). From the point of view of hospitals, the CoB, combined with JKN, could raise occupancy rates and result in higher profitability stemming from increased margins and reduced receivable days by shifting towards private insurers’ faster reimbursement method (exhibit 23) from the government’s BPJS Health (JKN agency). However, this is limited to a BPJS-participating hospital. In contrast, a non-BPJS hospital might see a migration in their in-and out-patients. Separately, the CoB would also be beneficial for BPJS-participating insurance companies (ie, higher client traffic) and raise BPJS participation rates, especially from the corporate sector due to lower private insurance premiums.

Government’s commitment to ensure JKN program continuity
The rise in healthcare needs has put some pressure on Indonesia’s state budget. After 2 years of operation, BPJS-Health has suffered c.IDR20tn in total deficit, of which IDR3.3tn was in 2014, IDR5.8tn in 2015 and it expects another IDR10tn for 2016. This poor performance of BPJS-Health is due to: (1) Lack of cross subsidies, (2) Adverse selection phenomenon and (3) Discrepancy in calculating premiums and claims. Nevertheless, given Jokowi’s support towards Healthcare, especially for those at the grass-roots level, we see commitment from the government to ensure continuity of this program, given its additional contribution to fund the deficit by injecting IDR5.6tn in 2014, IDR3.5tn in 2015 and IDR6.83tn in 2016.

SILO and KLBF as beneficiaries of government healthcare program
Our top pick among the listed private hospital players is SILO ($SILO), as it has the widest hospital network in Indonesia and embraced JKN into its business model. Aside from higher revenue on rising patient volumes, SILO is set to improve margins on higher bed-occupancy rates and a shorter ramp-up period for its new hospitals to reach maturity (from 5 to 3 years). Meanwhile, we maintain our HOLD call on MIKA ($MIKA) for its conservative expansion plan and likely loss of patient market share as the government’s new CoB program prohibits patients to obtain treatment from non-BPJS hospitals. In the pharma sector, KAEF ($KAEF) should benefit from the CoB scheme as its clinics are participants of both JKN and private insurance (Inhealth Insurance). However, due to KAEF’s more demanding valuation, we prefer KLBF ($KLBF) as a turnaround play on a recovery in branded generic drug consumption due to CoB.

Jul 01,2016 10:41:53
Mitra Keluarga Karyasehat ($MIKA): Still not that well
Reaffirm REDUCE despite earnings upgrade
At this stage, we revise up our 2016-17F earnings by 7-9% (exhibit 5) for MIKA to reflect stronger patient flows and higher margins driven by lower drug expenses, higher number of emergency cases and price increase in 2016. MIKA has implemented a 5% price increase and grown patient volumes by 7% y-y since the beginning of 2016, helped by its hospitals in the Greater Jakarta areas. The downtrend seen in patient volume has reversed in 1Q16 but the growth has still remained relatively weak compared to Siloam (SILO IJ-BUY-IDR11,175-TP:IDR12,000), a major beneficiary of the government’s JKN program and our TOP pick within the hospital space. On our revised expectations of higher revenue and net profits for 2016-17E along with the company’s healthy balance sheet and net cash position, we raise our DCF-based (10% WACC) 12-month TP to IDR2,200 from IDR1,900. However, we expect the erosion in market-share of patient volumes to continue given no new hospital openings and conservative bed capacity expansion in its existing hospitals of only 63 beds ytd, and reaffirm our REDUCE call. Looking at the stock’s recent market outperformance (exhibit 4), we believe the upside is minimal as current 2016F EV/EBITDA of 48x is already at a 120% premium to SILO’s valuation. Risks to our call include higher patient participation in the CoB scheme and low-quality services provided by JKN providers, shifting market share from other private hospitals.
Higher occupancy, int. income and margin expansion driving growth
Due to the dengue fever outbreak in 1Q16, MIKA recorded total patient volume growth of around 7% y-y. This coupled with a higher mix of complex cases and additional 5% price increase since the beginning of the year, helped MIKA book inpatient revenue growth of 19% y-y and outpatient revenue growth of 9% y-y bringing the total sales to IDR625bn, up 15% y-y. Aside from lower cost of branded generic drugs, MIKA’s margin expansion also stemmed from its higher occupancy rate to 73% from 66% in 1Q15 and 58% in 2015. Meanwhile, MIKA was able to reduce its quarterly opex by 6% leading to a jump in operating profit (43.5% q-q) and net profit (44.3% q-q). Bottom line grew 27% y-y supported by higher interest income (66.5% y-y). Stripping out the interest income, net profit growth fell to 18% y-y. In 2Q, we expect MIKA’s profit growth to be lower than 1Q as the fever outbreak has slowed down from April.
Delay in expansion plan likely to put pressure on patient volumes
MIKA recently experienced delay in its hospital expansion this year after having some hiccups in securing construction permit from the local government in Bintaro area. Although this has temporarily allayed a margin drop concern from a new hospital opening, MIKA will face challenges in maintaining its patient volume growth (exhibit 9) relative to its closest competitor, SILO, which has been more aggressive in its expansion strategy with 2 new hospitals already having opened ytd. We believe that the window of opportunity for MIKA to capture future growth is narrowing especially from outside Java, as its portfolio are very concentrated in two big cities only, Greater Jakarta and Surabaya.
Jun 21,2016 22:14:37
Mitra Keluarga: Banking on Quality ($MIKA)

- Mitra Keluarga (MIKA), a sister company of Kalbe Farma, is the largest hospital
operator by market cap in Indonesia. It enjoys the most attractive profit margin
among regional peers, thanks to its strong pricing power and high cost
efficiency. Along with rich cash generation, MIKA is our top pick for the sector.
Key risk lies in continuing pressure on patient volume due to the universal
healthcare (JKN). We reinitiate coverage on MIKA with a BUY rating and TP Rp
3,070 after factoring in a conservative recovery in patient volume.

- Underfunded healthcare raises huge growth potential for hospital operators.
MIKA is well positioned as a premium brand to capture growth from the middle
and upper income segment. Near-term prospect, however, hinges on a recovery
from a loss of market share to the new national health system JKN. We forecast
revenue to grow at 14.6/16.6% in FY16/17, factoring in a partial recovery in

- Resilient margin. Revenue climbed by 10.9% CAGR in FY14-15 due to higher
revenue base per patient and EBITDA margin sits at 32% over the same period
amid volume pressure. Key drivers are (1) strong pricing power given targeted
market and (2) high cost efficiency due to standardized procurement of drugs,
medical supplies and equipment and investment in IT platform. MIKA expects
EBITDA margin to expand by 0.5% annually over the next 5 years from wider
adoption of standardized drug list by doctors.

- Cash is king. With a reported operating cash flow of Rp699.6b in FY15 (up 28%
from FY14) and a net cash position of Rp2.39tr, MIKA can easily achieve their
target to build two new hospitals annually in 2017-19. Note that estimated
investment cost of a hospital is around Rp275bn. We expect MIKA to achieve its
expansion target to deliver 5.3% CAGR in 2017-2019.

- Initiate with BUY. We initiate coverage on MIKA with a Buy rating and a TP of
Rp3,070 based on DCF (WACC 9.8% and LTG 6%), implying a forward EV/EBITDA
of 54x in FY16 and 47x in FY17. Downside risk comes from worse-than-expected
recovery from JKN and a delay in new hospital.

Jun 15,2016 10:18:16
Oil at US$50/bbl – Sweet Spot for Indonesia; Tax Amnesty – On Schedule for June 2016 Implementation

- Higher oil price will reduce fiscal deficit — The Indonesian government now expects incremental revenue from the recent bounce in oil price to ~US$50/bbl. Despite Indonesia is a net importer of oil & gas, fiscal deficit could decline by Rp0.1- 0.9trn based on government’s calculation for every US$1/bbl of oil price increase. The government is currently using an oil price of US$35/bbl in their 2016 proposed budget and thus with higher oil prices, they should receive additional revenue from the oil & gas sector.

- Gasoline being sold at c.US$50/bbl equivalent after taking into account the distribution margins of Pertamina — The current price of gasoline at Rp6,550/litre translates to c.US$48-50/bbl of oil prices. Thus the government is already at a comfortable level in terms of the selling prices of gasoline, and should see no pressure to increase the prices unless the oil prices were to increase to a higher level, say US$55-60/bbl. At Rp6,550/litre, Pertamina is making a distribution margin of Rp1,010/litre, as per government calculations (see Fig 1 for government’s detailed calculation of fuel prices).

- Non-subsidized fuel (RON97) in Malaysia is cheaper vs that in Indonesia — RON95 gasoline price in Indonesia (Rp8,250/litre) is +22% higher than RON97 price in Malaysia (Rp6,715/litre). The RON97 in Malaysia is a non-subsidize fuel while the RON95 is still being subsidized and sold at Rp5,575/litre.

- Tax amnesty is still on schedule to be passed in June 2016 — We see such an outcome as not being priced in by the market (see our recent Indonesian strategy note - Still Positive: Spotlight on Five Key Issues for Market). The parliament head of commission XI, Ahmadi Noor Supi, mentioned that tax amnesty bill will not get delayed since it is a critical part of the government’s 2016 budget revision. As per the government, they have included proceeds amounting to ~Rp103trn (US$7-8bn) from the tax amnesty bill in the 2016 revised budget.

- Maintain our positive view on the market — At a 1-year forward PER of 15.1x, the JCI is not cheap but nor does it look overly expensive, and we maintain our 5,700 target (+16%) set last October. Sector-wise, we continue to like property, construction and infra. $ASII rejoins our top picks and we see more value in banks as gainers from the expected passage of a tax amnesty bill. Top picks: $BBNI, $BBTN, $LPPF, $TLKM, $ASII, $MIKA, $PTPP, $ADHI, $BSDE, $CTRA, $PWON and $JSMR.

- Key market catalysts and risks — 1) Tax amnesty; 2) Lower personal income tax which would lift purchasing power. Risks: 1) Fed rate hikes; 2) Delay in passage of tax amnesty; 3) Heavy-handed policy intervention

Apr 29,2016 09:46:41
Mitra Keluarga Karyasehat ($MIKA), Off To An Excellent Start

Post 1Q16 – which coincided with a dengue fever outbreak – Mitra Keluarga still expects healthy patient traffic in April, especially for its hospitals in the Jakarta region. It is receiving more corporate patients from the likes of PT Telekomunikasi Indonesia ($TLKM) and Perusahaan Listrik Negara. Its Tegal hospital in central Java, which serves BPJS (Indonesian universal healthcare) patients, is also seeing a pick-up in private patients. Thus, we keep our BUY call and DCF-based TP of IDR3,100 (19% upside).

Apr 29,2016 09:42:41
Indonesia: 12th stimulus policy – Further Streamlining in Various Permits
The government released the details of its 12th stimulus policy, which mostly aim to further simplify various permits in doing business. While the latest policy appears to be an accentuation of previous stimulus to streamlines business process, in our view the government continues to show its focus to attract more investment into domestic economy, especially given sizeable contribution from Gross Fixed Capital Formation (GFCF) to overall Indonesia’s economy.
Efforts to lure more investment
President Joko Widodo through several cabinet meetings has emphasized his means to increase the rating of the country’s Ease of Doing Business (EODB) to the 40th rank. The World Bank surveyed that Indonesia stood at rank 109th from a total of 189 surveyed countries. Other ASEAN countries such as Singapore and Malaysia stand at the 1st and 18th rank of the list. Currently, there are 10 indicators that measure the EODB rank for a country. The indicators are business starting process, construction permit dealing process, tax payment, credit accessibility, contract enforcement, electricity supply, across border trading, insolvency settlement, and minority investors protection. To comply with the indicators, the Indonesian Economic Ministry along with the Investment Coordinating Board formed deregulations through the 12th Economic Stimulus.
Key points of the 12th stimulus policy
The 12th stimulus introduced a new deregulation scheme that will cut 94 procedures into only 49 procedures and 9 permits to only 6 permits. Furthermore, the stimulus package is followed by the release of 16 new regulations.
¨ For the business starting process, the initial regulation requires investors to go through 13 procedures that will take 47 days and IDR6.8m-7.8m to obtain Business Permit (SIUP), Company Registration (TDP), Deed of Establishment, location permit, and nuisance permit. With the deregulation, investors will only need 7-10 days procedure with IDR2.7m fee. Moreover, the government will only require 3 permits for micro, small and medium enterprises (MSME), which are SIUP, TDP, and deed of establishment.
¨ The government also released a new regulation through regulation no 7/2016 on changes in authorised capital for limited company. With the new regulation, MSME’s authorised capital will be determined by mutual agreement of the founders as outlined in the deed of establishment. However, the regulation will keep enacting the minimum requirement of IDR50m for limited company.
¨ As for building construction permit, the government will cut the process into 14 procedures within 52 days from initial of 17 procedures and 210 days of processing time. Moreover, the building construction permit fee will be reduced to IDR70m from the initial fee of IDR86m.
¨ Tax payment process will be cut into 10x payments with online system from an initial of 54x payments. While property registration will be cut into 3 procedures in 7 days with a fee of 8.3% from the value of property. The government previously imposed 5 procedures with 25 processing days and 10.8% fee for the property registration.
¨ The government also decreases the simple lawsuit settlement process to only 8 procedures in 28 days. Any disagreement on the verdict will be able to appeal with additional 3 procedures and maximum of 10 days of settlement.
Follow-up measure to reduce overall execution risk

Before the release of the 12th stimulus package, the government has released a total of 195 regulations from September 2015- April 2016. The government stated that as of 18 April, it has successfully completed 169 regulations or 87% from the total regulation released. There are 16 (8%) regulations that are still in the discussion process, while the remaining 10 regulations that will be taken out from the Economic Stimulus Package. The government stated that each packages received positive responses from investors and citizens. However, the government will increase its socialisation and evaluate the implementation through dissemination and business clinics. The business clinics aimed to further discuss the stimulus packages with stakeholders to ensure the on the ground efficiency of the packages. Moreover, the business clinic will also serve as the communication facility between investors and government to resolve any problems, including the export increment issues. The clinics and dissemination will be implemented in 3 regions, such as Palembang, Balikpapan, and Lombok.
The near term catalyst is the tax amnesty approval
We continue to believe that tax amnesty approval could serve as one of major catalyst in the near term. Post the Parliament’s recess session, the long-awaited tax amnesty bill is finally being discussed under the Commission XI, which has been holding hearing sessions with experts, business leaders and other stakeholders. Given its importance on the overall budget and the progress of infrastructure development, the Government is mulling over the fact that the bill could take effect in June. We believe the initial approval of the tax amnesty could be an important catalyst for the near term, as well as a major step taken in the right direction to finally foster the compliance of taxpayers – which could help solidify the Government’s overall budget composition going forward. As such, we expect further foreign fund inflows to support the market post the approval of the tax amnesty although we acknowledge that execution risks still remain at this juncture. Our top pick in the market are $BBCA, $BBTN, $ICBP, $INDF, $ADHI, $LPPF, $MIKA, $TLKM, $BSDE and $LSIP.