Raffles Medical Group - CIMB Research 2015-12-09: A proxy for China healthcare

RAFFLES MEDICAL GROUP LTD R01.SI

Raffles Medical Group - A proxy for China healthcare

New capacity coming on stream: 1) Holland Village in 1Q16, 2) hospital extension in 2Q17, and 3) Shanghai hospital in mid-2018.
Negative impact of slowing medical tourism started to show in 2015. A slowing Indonesian economy and weak rupiah do not bode well for medical tourism.
A more measured pace of topline growth and margin pressure as the group increases headcount for its expansion projects will likely be a drag on earnings.
Maintain Hold with a SOP-based target price of S$4.67. We prefer IHH in the hospital space.

Raffles Holland Village, a 5-storey commercial building, is slated for completion in 1Q16. RFMD will utilise 9k sq ft of the 65k sq ft total GFA (~20% of estimated NLA) for the expansion of its medical and specialist services, and lease the remaining space to retailers and other food and beverage (F&B) tenants.
The biggest positive is the immediate rental income, although the medical centre may be a drag on earnings until it achieves operating leverage.

The hospital extension (S$310m cost, ~40% paid) will add 220k sq ft (+73%) of space to its existing hospital wing. This is expected to underpin topline growth and improve its hospital margins as the group is better able to allocate facilities and wards across the old and new wings.
Management sees this as the runway for the next 10 years. The dampener here is waning medical tourism numbers (medical tourists typically account for 1/3 of total patient load), exacerbated by the weakening ASEAN currencies.

Expansion into China has been a theme across hospital groups in 2015, and is justifiably so after
1. 1) the liberalisation of the Chinese healthcare space,
2. 2) its large population base, and
3. 3) ageing population.
While there are obvious long-term prospects, it remains unchartered territory.
The total development cost for RFMD’s 400-bed hospital (70:30 JV) is Rmb800m, which is likely to be funded by equity (1/3) and debt (2/3). Completion is slated for mid-2018.

Given the group’s expansion pipeline and slowdown in medical tourism (medical tourists typically have higher intensity), there could be some pressure on margins in FY16-17, especially as the demand for nurses in Singapore remains high.
In the longer term, a ramp-up in capacity should improve operating leverage.

In 3Q15, RFMD
1. opened a 5.4k sq ft medical centre in Osaka, Japan via a 51% JV (effective stake of 40.8%), and
2. acquired International SOS for US$24.5m (55% stake).
International SOS operates a total of 10 clinics in China (6 clinics), Vietnam (3), and Cambodia (1). We do not expect any meaningful financial contribution from these two ventures and view the Chinese clinics as providing ‘hub and spoke’ patient referral for the eventual completion of its Shanghai hospital.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

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