Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-08-01: Prognosis ~ Long-term Potential Deferred; D/G To SELL

Raffles Medical Group (RFMD SP) - Maybank Kim Eng 2017-08-01: Prognosis: Long-term Potential Deferred; D/G To SELL RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Prognosis: Long-term Potential Deferred; D/G To SELL

EPS & TP slashed on weaker growth & start-up losses 

  • We downgrade Raffles Medical Group (RFMD) to SELL as: 
    1. Singapore’s growth missed again for the third straight quarter and underlying weakness is structural in our view, 
    2. management guided for much higher than expected start-up losses for its China Hospitals that could erode up to 30-40% of group EBITDA. 
  • As a result we cut our FY17-19E EPS by 3-38% for FY17-19E and our DCF-based TP 27% to SGD1.12 (WACC 7.1%; LTG 1.5). 
  • RFMD trades at a P/E 40x FY18E, with a profit decline outlook for the next three years.

Key market, Singapore, continues to face challenges 

  • Topline growth for Singapore, the key market remains weak, at only +1% YoY for 2Q17. 
  • Management reckons that the market remains challenging as Singapore’s high cost structure makes it less attractive to medical tourists. Medical tourists’ volume continues to decline and management has reduced its growth expectations. 
  • Also, we believe Raffles Medical could be losing market share, as we note that IHH’s (IHH MK; HOLD, TP MYR6.15) Singapore operations have reported better revenue growth in most of the preceding quarters. 
  • In addition, three consecutive quarters of weak revenue growth of -2 to +3% YoY could suggest structural weaknesses and has led us to trim both our revenue and EPS.

Pain before gain for China’s Hospitals 

  • Although management remains positive on the long-term potential of China, it has revealed several new pieces of information as it approaches the opening of its first hospital: 
    1. start-up and operating costs in the initial years could potentially erode 30-40% of Group’s EBITDA; 
    2. it could take 3 years for its hospitals to reach EBITDA breakeven; 
    3. the opening of Shanghai Hospital has been delayed to 2H19 due to construction delay.
  • In the light of the new information, we revisited our financial model and incorporated the start-up losses into the Group’s forecast.

Swing Factors


  • 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.


  • 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/ 2017-08-01
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.21 Down 1.540