Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-04-10: Sacrificing Near-term Growth For Future Growth

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-04-10: Sacrificing Near-term Growth For Future Growth RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Sacrificing Near-term Growth For Future Growth

  • RMG’s latest venture in Chongqing is a long-term positive but likely to crimp near-term earnings growth on front-loaded costs. 
  • We maintain 2017-19 earnings estimates but see potential downside of up to 6-15% in 2018-19 on front-loaded costs from new hospitals. 
  • Reiterate BUY and DCF-based target price of S$1.66. 
  • We estimate the new Chongqing hospital could add S$0.11/share to our valuation but this is pending more information on the new venture.


Deeper footprint in China. 

  • Raffles Medical Group (RMG) recently announced the acquisition of a 28,000sqm land site in Chongqing with an in-construction building for Rmb188m. 
  • We recently caught up with management and this report highlights our latest view on the company.


Limited details on latest venture. 

  • We understand that more details will be released in 2Q17. On the land acquisition, RMG will initially have a 100% stake in the new hospital but we think the group may be open to strategic partners. 
  • Nevertheless, RMG is expected to maintain controlling interest in the event of an entry of a new partner for the Chongqing hospital and at this point, nothing has firmed up yet. 
  • Including the initial purchase cost of Rmb188m, total investment for this project is expected to come up to Rmb1b (S$203m, based on Rmb4.92/S$).

Financing the latest expansion. 

  • Assuming 70% of the investment of S$203m is by debt, RMG’s FY18F net cash will revert to a slight net gearing of 0.5%. This is not an issue given its strong operating cash flow. The targeted completion of the construction of the new hospital in Chongqing is 2Q18 and the plan is for a 700-bed international tertiary general hospital. 
  • Similar to RMG’s hospital in Shanghai, we believe the group will open the hospital in phases, depending on demand and the availability of doctors. We understand that recruitment of doctors for the Chongqing hospital will commence in early- 18 and some of the doctors will be recruited via a fellowship programme, which is to transfer local doctors from China for fellowship and training in Singapore before being posted back to China.

Raffles Hospital extension remains on track. 

  • The Raffles Hospital extension is poised to complete by Aug 17 and will contribute an additional 220,000sf of GFA to Raffles Hospital. The integrated medical complex will add to the existing hospital’s range of specialist services, healthcare training and clinical research as well as open opportunities for growth and expansion in the future. 
  • Depending on demand, RMG could also open up more beds compared to the current 200 beds at the Raffles Hospital.


Raffles Holland V coming along nicely. 

  • The group remains positive on the performance of Raffles Holland V medical centre. Situated on level five of the mall, the medical centre offers integrated services including family medicine, health screening, dental and traditional Chinese medicine. 
  • Meanwhile, about 95% of the space has been leased, and Virgin Active has moved in since April.

Firm tourist arrivals bode well but watch the currency weakness. 

  • Tourist arrivals to Singapore rose 7.8% yoy in 2016 and 4.8% yoy in Jan 17. However, the strong Singapore dollar vs regional currencies such as the Malaysian ringgit and Indonesian rupiah could impact foreign patients (+2% ytd), which are estimated to account for a third of RMG’s foreign patients. 
  • However, for RMG, the group has a large foreign- patient base from over 100 countries, which we believe could help RMG weather any weakness from several countries.


Near-term pain for long-term gain. 

  • We maintain 2017-19 net profit estimates but see a potential downside of up to 6-15% in 2018-19 if we build in higher costs for staff and other miscellaneous expenses ahead of the opening of its China hospitals from 2018. 
  • Based on this, RMG’s 3-year EPS CAGR could decline to 10.5% from 15.2% currently.


BUY for long-term growth but brace for limited near-term growth. 

  • Although RMG’s near-term earnings outlook is likely to be dampened, the group’s runway for long-term growth will be significantly enhanced for the next 10 years. This will be from end-18 when its new hospitals in Shanghai and Chongqing are completed. 
  • We estimate the Chongqing hospital could add up to S$0.11/share to our valuation. 
  • Reiterate BUY and DCF-based target price of S$1.66.


  • We see possible catalysts from: 
    1. better-than-expected performances from Raffles Medical Centre Orchard and Raffles Holland V, and 
    2. quick ramp-up in demand for its newly extended Raffles Hospital and China hospitals.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.660 Down 1.670