Raffles Medical Group - CIMB Research 2017-04-25: 1Q17 Post-Analyst Briefing Updates ~ Hints of Weak Demand

RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - 1Q17 post-analyst briefing updates: hints of weak demand

Management blamed the group’s topline decline entirely on weak medical tourism (particularly from Indonesia), sharing that domestic patient volumes are still growing.
Key operational updates: Shaw medical centre remains loss-making but Holland V is profitable (broke even in 7 months). ISOS continues to be loss-making.

No change to Raffles hospital extension’s 4Q17 opening.
We tweak our model to incorporate Chongqing, which lifts our SOP-based TP slightly. However, valuations still remain unattractive. Maintain Reduce.

Both healthcare (-2.0% yoy) and hospital (-1.9% yoy) segments recorded revenue declines which management blamed on weak medical tourism.
Yet again, management cited
1. weak regional currencies vs. S$,
2. higher relative costs in Singapore, and
3. regional competition, as reasons for the weakness.
On a more positive note, domestic volumes are still growing (small single-digit level).
Overall, sentiment and demand is still weak, which further restricts RFMD’s ability to raise ASPs.

We were initially expecting 1Q17 to be bolstered by new contributions from Holland V (opened in Jun 16), especially from rental revenue. However, this failed to materialise.
Management explained that 1Q17 did not include a full quarter of rental contribution as some tenants have still not moved in, but we should see a full quarter’s contribution from 2Q onwards. Management also shared that their Holland V clinic is now profitable.
Nonetheless, we do not expect Holland V to move the needle for the group.

In addition to Holland V, other recent notable expansion plans include:
1. ISOS, and
2. Shaw medical centre.
ISOS is still loss-making and not much has changed sequentially although management is working to turn it around this year. Shaw medical centre (opened Jun 15) is also still loss-making despite operating for close to two years.
Management attributed to its larger floor area. We think slowing medical tourism has not helped either, as the clinic was primed to target Indonesian patients.

Management provided some colour on the group’s 700-bed Chongqing hospital. Key details include:
1. 200 beds will be opened upon completion in 2H18,
2. on top of that, an additional 100 beds will be opened for public use (i.e. for Yibao-accredited patients and this business should be viewed as operating at breakeven levels),
3. total estimated capex will be Rmb1bn, and
4. management sees per patient revenue in Chongqing as comparable to Singapore, but lower than Shanghai.

We now include Chongqing in our SOP-based valuation, but also tweak valuations of the group’s Singapore business to reflect the weaker demand. Accordingly, our TP rises slightly to S$1.37.
With valuations still rich at 25.5x CY17 EV/EBITDA (above peers’ 23x and its 10-yr historical mean of 20.3x) and earnings growth muted, we choose to maintain our Reduce call.
Key risk includes lower-than-expected gestation costs.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-04-25

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.37 Up 1.360