Raffles Medical Group (RFMD SP) - Second hospital in China
G2G initiative to build a new hospital in Chongqing
- Raffles Medical has acquired a plot of land (28k sq metres) and a partially-constructed building in Chongqing for the development of a 700-bed international tertiary general hospital.
- Few details were given as key information, including % ownership, total capex, and start-up plans are still being determined. As the project was initiated at the government level (G2G), regulatory issues should be manageable.
- Management is positive on:
- undersupply of hospital beds in China (0.4 beds/1,000 population);
- Chongqing’s vast market ( >30m population); and
- Chongqing’s strategic location for One Belt One Road Initiative (railway connecting Central Asia, Russia and Europe).
- We keep our EPS and TP, pending more details. Maintain BUY and DCF-TP of SGD1.70 (WACC 7.1% and LTG 1.5%).
Fast-tracking of project: completion in 2Q18
- This project was finalised in just one month, since the signing of the MOU in 27 Feb 2017 with the Chongqing Liangjiang New Area Administrative Committee.
- Construction of the hospital has already started and it’s expected to be completed in 2Q18. The construction period, which normally takes 2-3 years, was fast tracked after the acquisition.
- The land acquisition cost and construction expenses incurred up to the end of Jan 2017 are approximately CNY188m. Total capex and % ownership have not been finalised, but management expects to keep capex at below CNY1b.
- This will be Raffles’ second hospital in China and should open ahead of its 400-bed Shanghai hospital, targeted for 1Q19.
Execution risks mitigated by gov’t co-operation
- Including this project, Raffles will have a capacity of 1,100 beds in China by 2019. This is much higher than its 380-bed capacity in Singapore.
- Beyond the positives, risks have also increased, including:
- execution risks in managing the opening of two large hospitals in China, where a lack of demand and cost overruns could impact earnings; and
- regulatory risks, which could delay or disrupt operations.
- To mitigate these, Raffles is building a good understanding of the China market, with seven medical clinics/centres across the country, and actively seeking co-operation with the government to minimise regulatory risks.
- Further progress on more hospital in China, which could be in other top cities. Shenzhen hospital first announced in Feb 2013.
- Faster-than-expected breakeven for Singapore expansion.
- Normal breakeven period is one year.
- Medical tourism in Singapore could recover from 2015 weakness as RFMD is constantly seeking new source markets.
- Execution risks for Shanghai hospital, its first outside Singapore.
- Higher-than-expected start-up costs in major expansion markets such as China.
- Structural decline of medical tourism in Singapore.