Raffles Medical (RFMD SP) - DBS Research 2017-04-03: Riding on One Belt, One Road

Raffles Medical (RFMD SP) - DBS Vickers 2017-04-03: Riding on One Belt, One Road RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical (RFMD SP) - Riding on One Belt, One Road

  • Raffles inks agreement with Chongqing government for second hospital in China.
  • Acquires land and building under construction in the New North District.
  • Target to complete by 2Q2018, ahead of Raffles Shanghai Hospital.
  • Complements long-term China expansion plans; execution is key.

What’s New 

Acquires land and building under construction in Chongqing with support from the Chongqing government. 

  • Following the signing of a MOU with Chongqing Liangjiang New Area Administrative Committee in 27 Feb 2017, Raffles Medical announced an acquisition of a new piece of land with a building under construction for the development of a 700-bed international tertiary hospital for RMB188m (about SGD38m).
  • The hospital that is under construction is strategically located in the New North District of the Liangjiang New Area in Chongqing. The New North District is an economic administrative zone which includes Chongqing Economic and Technological Development Zone, Chongqing HighTech Industrial Development Zone and Chongqing Export Processing Trade Zone. 
  • Apart from serving the local and surrounding population, the location allows Raffles Medical to tap on potential growth in the expatriate community following from employment opportunities in the economic zones.

Key details of the project. 

  • We understand that Raffles Medical will own 100% of the hospital currently but does not rule out a potential partnership in the future if a good opportunity arises. The preliminary total estimated development cost is approximately RMB1bn or S$200m (RMB1.4m per bed vs RMB2m per bed for Raffles’ Shanghai hospital). This will be partially funded by internal cash and debt.

Expected completion by 2Q2018. 

  • As the building is currently under construction, Raffles Medical targets to complete by 2Q2018, ahead of its Shanghai Hospital which is targeted to complete by end of 2018 and to open by early 2019.

Complements long-term China expansion plans; execution is key in the near-term. 

  • This bodes well with Raffles’ long-term plans to expand its footprint in China, and complements its Shanghai hospital, and plans to build new hospitals in Beijing and Shenzhen. 
  • We believe there will be near-term positive sentiment following the announcement based on past experience when Raffles announced plans to expand into Shanghai. However, execution is key, with the opening of two big hospitals in 2018 / 2019 in a new market for Raffles Medical.

We maintain our HOLD rating with a TP of S$1.40. 

  • While we remain positive on Raffles Medical’s long-term growth plans, we believe its current valuation at 24x FY17F EV/EBITDA, above the higher end of the sector’s historical range, has reflected its growth potential. In the near-term, growth could be weighed down by start-up costs following its aggressive expansion plans. 
  • Potential re-rating catalysts are 
    1. better-than-expected ramp-up of new projects/integration process, and 
    2. further accretive acquisitions and/or JVs/strategic alliances for entry into new markets

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-04-03
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.400 Same 1.400