DBS Group Research analyst Paul Yong has downgraded Econ Healthcare (Asia) to “hold” after the private nursing home operator invested some $4 million in Hong Kong-listed Crosstec, which later saw an 84% decline in share price. 

“While the losses could be recouped, we believe Econ’s investment mandate and strategy should be tightened significantly,” writes Yong in a Jan 12 note.

Yong has a target price of 28 cents for Econ Healthcare, with a raised weighted average cost of capital (WACC) of 11.8%. 

Back in November, Yong had a “buy” call and 40 cents target price on the stock.

Econ Healthcare is a leading premium private nursing home operator in Singapore and Malaysia, with presence in China. It is a beneficiary to aging population trends in Singapore, Malaysia, and China, says Yong, with more than 10% forecasted CAGR from 2020 to 2024F.

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DBS Group Research forecasts 12% net profit CAGR from FY2021 to FY2024F, with a 40% increase in nursing bed capacity from 1,376 beds to 1,936 beds by FY2024F.

Econ Healthcare recently used some $4.0 million of its idle working capital to buy 11.8 million Crosstec Group Holdings shares, an interior designer listed on the Hong Kong Stock Exchange. 

See also: Econ Healthcare spends $4 million to buy shares of Hong Kong listed interior design firm Crosstec

Econ Healthcare first paid $1.99 million for 6.8 million Crosstec shares on Dec 30, or 29.26 cents each. It paid another $2 million for another 5 million Crosstec shares on Jan 6, or 40.04 cents each.

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The investment in Crosstec, which reported a loss for its FY ended June 30, was to “improve the yield on idle cash through dividends and share price appreciation”, Econ Healthcare states in a Jan 9 filing to the Singapore Exchange.

On 11 Jan, Crosstec saw an 84% decline in its share price to HK$0.38, which implies a potential investment loss of over $3.2 million for the company, equal to approximately 118% of FY2022F net earnings, notes Yong.

The investment of $4 million represents 10% of its forecast shareholder equity for March 2022, he adds. 

Econ Healthcare needs to reconsider this investment mandate, writes Yong. “While the company stated that the investment was intended to improve the yield on idle cash through dividends and share price appreciation, the investment of the majority of its idle cash into a single, lossmaking, small-cap company is a riskier decision than one would expect.”

Investors should wait for further clarity before focusing back on core business, adds Yong. “We believe that the growth prospects for Econ’s core nursing home business remain intact, but we prefer to wait for more clarity on the company’s plans for its investment strategy before turning positive.”

Crosstec’s share price began its ascent on Nov 16 from 40 HK cents, reaching a 52-week high of $2.65 on Jan 6.

Crosstech shares closed at 27 HK cents on Jan 12, down 28.95% for the day; Econ Healthcare closed at 28 cents on Jan 12, down 3.45%.

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Photo: Econ Healthcare