Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-04-25: 1Q17 Miss Due To Singapore; Reiterate BUY On China Growth

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RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 1Q17 miss due to Singapore; Reiterate BUY on China growth

Positive on China; caution on short-term weakness 

• 1Q17 earnings were flat YoY and missed our expectation, meeting 21% of our FY17E. Revenue declined 2% YoY due to softer demand from foreign patients. 
• We cut our FY17-19E EPS by 3-8% and our Singapore’s TP by 11% to SGD1.16. 
• On the upside, our China’s TP is increased 32% to SGD0.50 as we factor in the Chongqing Hospital Project. 
• Overall, our TP is revised down 2% to SGD1.67. Maintain BUY for long-term potential of business expansion into China, which is estimated to turn profitable in 2020 (2nd full year of operation). 
• In the medium term, the slowdown in Singapore and start-up costs for two China hospitals could drag earnings.

Softness in Singapore operations 

• We cautioned that weaker demand in Singapore could continue due to a softer economic outlook there and in the region. Management highlighted that competition within the region has increased and Singapore’s expensive pricing might discourage price sensitive patients from visiting. 
• From the financials, we noted two rare signs of revenue weaknesses: 
  1. 1Q17 recorded the first YoY revenue decline since 4Q04; and 
  2. 4Q16 recorded the first ever QoQ decline.

Positive on China Hospitals 

• On the bright side, both Shanghai and Chongqing Hospitals could lift growth in the mid to long term. Management revealed more operational and start-up information for the new Chongqing hospital. The 700-bed hospital will start with 200 private beds and 100 public beds by 2018.
• The public beds will serve as a good training ground for doctors and enable more local patients to understand Raffles Hospital’s operating model. 
• For Shanghai hospital, it should start with 200 private beds, shortly after Chongqing Hospital. We expect both hospitals to turn profitable in 2020, the second full year of operation. However, we caution that start-up costs in 2018 and initial operating losses in 2019 will drag earnings. 
• We estimate both hospitals to incur losses of SGD3.4m in 2018 and SGD2.3m in 2019, before reporting positive earnings of SGD2.0m in 2020.

Swing Factors

Upside

• Further progress on more hospitals 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/ 2017-04-25

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.67 Down 1.700