Raffles Medical Group - UOB Kay Hian 2016-06-06: Setting The Stage For Long-term Growth

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Setting The Stage For Long-term Growth

We remain upbeat on Raffles Medical Group’s China venture. Its acquisition of International SOS clinics will strengthen the group’s foothold in China and provide further expansion opportunities in markets such as Vietnam and Cambodia.
Maintain BUY and DCF-based target price of $1.70.

This report highlights the takeaways after our recent meeting with management as well as updates on ongoing projects.

Raffles Medical Group (RMG) recently completed the rebranding of its newly acquired regional International SOS (ISOS) clinics to RMG. The integration of ISOS, which has six clinics across China, is pivotal to the upcoming launch of Shanghai Hospital in 2018 as it serves three important benefits.
First, the acquired clinics are strategically located in highly populated cities across China, including Beijing, Tianjin, Shenzhen, Nanjing and Dalian, which helps to raise visibility of the RMG brand.
Second, ISOS is a strategic platform which serves major MNCs as well as NGO members, giving RMG exposure to these client profiles through privileged access benefit plans. This can help build a strong patient data base and feed patient flows through cross referral to the Shanghai Hospital.
Lastly, with a team of c.60 doctors in the ISOS network, this gives RMG access to a team of qualified and trained medical professionals in China. This strategy has proven to work in the Singapore model, where RMG first began its expansion plans via GP clinics, before progressing to day surgery and Raffles Hospital.
We understand that ISOS contributed about 9% to top-line in 1Q16, and is profitable.

The 400-bed Raffles Hospital Shanghai project is on track and targeted for completion by 2H18, where 100 beds will likely come on stream upon opening. We understand pricing could be up to a 20% premium to Singapore’s pricing as it focuses on high-end and premium treatments. Meanwhile, RMG is also looking at opportunities outside of Shanghai, including Shenzhen (Shenzhen project still at MOU stage) or Beijing, and potentially the IndoChina region, where RMG already has exposure through its ISOS clinics in Cambodia and Vietnam.

One of the concerns raised was difficulty in securing medical talents for foreign hospital operators in China and the “red envelope” practice in China’s healthcare industry.
We believe standard and quality are well managed as RMG’s tried and tested group practice model allows them flexibility in terms of talent management and staff placement. Measures such as sending Singapore-based doctors to China or placing Singapore practitioners on medical leadership positions in its newly set-up hospital can ensure high RMG standards remain intact. As an indication, three RMG doctors have recently passed the Chinese Medical Exam and are now qualified to practise in China.
Looking ahead, RMG has plans to groom local Chinese doctors, such as a fellowship programme where Chinese medical graduates have the opportunity to undergo training in Singapore.

This month, we can look forward to the opening of the third multi-disciplinary medical centre in Raffles Holland Village, where RMG is occupying 9,000sf on level 5.
Currently, about 70% of commercial space has been tenanted out and rental is projected at S$12-15psf/month, with units on the ground floor fetching more than S$20psf/month.
Meanwhile, Raffles Medical Centre Orchard, which commenced in Jun 15, is ramping up well, with breakeven projected by 3Q16, within the 1-2 years window guided by management.

We believe staff costs will remain elevated following the newly consolidated ISOS clinics. We understand the cost structure for ISOS is relatively high, with staff cost/turnover at about 60% compared to generally about 50% in Singapore.
Nevertheless, we opine that the group’s strategy will be to improve revenue generation for ISOS and we think this could be from cross referrals from RMG’s network and a re-branding exercise of ISOS.
Meanwhile, we also anticipate a ramp-up of staff costs ahead of hospital extension in 2017 as well as the Shanghai Hospital opening in 2018, given the lead time of up to 1-2 years needed to train new staff.

No change to our earnings forecasts. On our latest estimates, RMG is projected to deliver a 3-year EPS CAGR of 13.9% (2016-18F).

BUY as growth capacity remains intact and expansion plans on track.
We are positive on RMG’s long-term prospects and re-iterate BUY and DCF-based target price of S$1.70.
At our target price, the implied 2017F PE is 34.9x. This is more than its +1SD to mean PE of 31.4x, which is deserved as we forecast its 2016-18F ROE at 11.8-14.0% vs its long-term average of 11.6% since 1997.
Also, we think its new capacity in China and Singapore will provide growth capacity for the next 5-10 years.

Positive catalysts include:
1. better-than-expected 2016-17 earnings,
2. rising dividends, and
3. more accretive new investments in China or M&As.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.70 Same 1.70