Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-04-04: Second hospital in China

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RAFFLES MEDICAL GROUP LTD BSL.SI

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: 
  1. undersupply of hospital beds in China (0.4 beds/1,000 population); 
  2. Chongqing’s vast market ( >30m population); and 
  3. 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: 
  1. execution risks in managing the opening of two large hospitals in China, where a lack of demand and cost overruns could impact earnings; and 
  2. 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.

Swing Factors

Upside

• 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.

Downside

• 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.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-04

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.700 Same 1.700