Raffles Medical - Phillip Securities 2016-01-15: Healthcare Beyond Borders and Beyond 40 Year Milestone

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RAFFLES MEDICAL GROUP LTD R01.SI 

Raffles Medical Group Ltd (RMG) - Healthcare Beyond Borders and Beyond 40 Year Milestone 

• Expansion plan in domestics and oversea on track with additional capacity and specialist services to absorb growing global demand. 
• Riding on regional reform drives would give RMG a good head start in gaining foothold in the untapped private healthcare sector. Supportive government policies coupled with its know-how give RMG an upper hand. 
• Integration across border, including effective use of information technology and improving processes such as bulk purchasing of medical supplies. 
• We upgrade to Buy rating with TP of S$4.74 on strong positive growth outlook. 

Investment Merits 

Strong brand name – 

• one of the largest private healthcare services providers, helmed by strong management team and clinical leaders. It has established 40 years of track record and history in healthcare services. Offers a wide range of products and services 
  1. Integrated care from primary to tertiary care, complemented with consumer medical products and health insurance, RMG has the breadth and length to achieve economies of scale. 
  2. Enable RMG to weather through challenging economic landscape. 
• The management shared that it would focus on non-discretionary services (e.g. general practicioners, emergency healthcare, maintenance drugs for chronic conditions), and advocate elective surgery (while patients and doctors could prepare themselves) in current slowdown. 

Well established network – 

• wide network of clinics domestically, while reaching out to customers within the region as well as Middle East. 
• Notwithstanding the 11 representative offices, the recent development extend RMG’s medical facilities into ten additional cities, which could translate to a larger patient base and heighten its role in regional healthcare system. 
• Track record of growing dividend, supported by its strong operating cash flow generation and intact growth story. 

Investment thesis for healthcare is still intact and relevant 

A multi-billion-dollar industry and still increasing – 

• Demand for healthcare services is expected to rise substantially, against the background of an aging population, coupled with changing disease patterns arising from lifestyles and diets. 
• Growing middle-income class and affluent consumers within the region would also increase demand for private healthcare services. 
• Supportive demand trend would inspire more spending on healthcare. Within Singapore only, public healthcare spending is expected to rise from over S$9 billion to over S$13 billion in 2020. 

Asia, a magnet for medical tourists – 

• In particular, Thailand, Malaysia, and Singapore in the Southeast Asia region, are touting for their economical world class standard healthcare facility and services, with secure and cultural environment. 
• In addition, availability of specialized medical treatment coupled with international accolades and ranking in the global platform are strengthening the regions’ medical tourism identity. 
• Singapore has 21 Joint Commission International (JCI) accredited hospitals and health centres, that compares to Thailand’s 50 and Malaysia’s 13 organizations. 

Tapping on Asia’s healthcare system reboot – 

• To achieve efficient, accessible and sustainable healthcare, governments pledged to step up on their healthcare reforms. More opening up and policies to build an investment-friendly business climate are likely to continue. 
  1. SG introducing more Public-Private partnership to fill the gap between the imbalance demand and supply. 
  2. China expediting its reforms via 
     1. increasing mobility of healthcare resources, 
     2. easing rules on private ownership, and 
     3. relaxing basic medical social insurance rules. 
  3. Japan regulating medical fees towards affordable healthcare and transparency in pricing. The recent bi-annual medical fees review in Dec-15 has raised medical services fees by 0.49% to increase the wages for care givers, while official drug prices will be lowered by 1.33%. 
  4. Other emerging markets in Indochina region, e.g. Vietnam and Cambodia, remain attractive as 
     1. advanced healthcare remain very limited, and 
     2. expanding universal health coverage and healthcare funding. 

Healthcare a long-term play – 

• Healthcare is a basic necessity for every individual. Come rain or shine, and especially in a rising health awareness environment, individual would still make trips for health advices, making it a defensive sector. 

Investment Risks 

• Growing competition, domestically as well as globally 
• Meek macro outlook and flagging medical tourism 
• Margin compression due to increasing operating costs, in particular, higher labor cost and government’s push for affordable healthcare 
• Significant regulatory changes 
• Execution risks in expansion and renovation plan 
• Attract and retain skilled workforce amid medical talent crunch 

Investment Actions 

• With the change of analyst, we upgrade to Buy rating with TP of S$4.74 on strong positive growth outlook.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-01-15

Phillip Securities SGX Stock Analyst Report BUY Upgrade HOLD 4.74 Same 4.74