The Malaysian healthcare tourism is projected to grow to US$600m by 2010; the implicit 30% CAGR dovetails nicely with HMI's ambitions to be a major hospital player in Malaysia. With HMI's Mahkhota hospital already controlling 20% share of the total healthcare tourism market, the company will get a boost in this secular theme with its recently announced 100% acquisition of Regency hospital in Johor Bahru.

Management expects Mahkota to continue to post 10-13% for FY07. Marketing initiatives are being stepped up with HMI launching five more information offices in East Indonesia to tap on Indonesia's inbound patient market. For Regency, the new hospital will be HMI's growth driver in FY08 and beyond. KE estimate it will contribute 22% of Hospital Operations' revenue mix for the first year, building up to 37% by FY09. Patient utilisation for Regency is expected to be strong as Johor lacks proper medical facilities given that there have not been any newbuild construction in the past 20 years. Capex outlay is estimated to be in the range of RMB 30m for phase I of Regency and refurbishment of Mahkota in 2007 and 2008; with a net cash position, HMI will gear up to fund these investments. To help with cashflow, HMI also intends to sell off medical units to lessen its financing burden.  Overall, KE expect hospital operations to contribute 96% of topline sales in FY07.

KE also expect strong turnaround performance in FY07 from the Education and Training segment due to two growth drivers. Both programmes - Certificate in Nursing Practices for Foreign Educated Nurses and Bachelor of Nursing will be increasing their intake of students and starting its course in January 2008 respectively. While this segment is expected to contribute 4% of total revenue in FY07, further initiatives are underway to export the business model to foreign markets especially to China where there are strong supply of nurses seeking international qualifications. HMI is the provider of such qualifications.

KE reinitiate coverage on HMI with a hold rating solely on valuation grounds. HMI is currently trading at 9.4x FY07 PE (including EI) and 27.2x (excluding EI) compared to 16.9x FY07 PE regional peers comparison, which counts Pantai Holdings at 16x FY07 PE. KE see fair value at 20.0x FY07 PE and target price of $0.10 based on stronger operating margins compared to its Malaysian peers. Key risks are the high start up risks of capital-intensive Regency and keen competition from the likes of Parkway.