Raffles Medical Group - UOB Kay Hian 2017-08-01: 1H17 Slightly Below Expectations But Watch Out For 2018 Costs Ahead Of China Expansion

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-08-01: 1H17 Slightly Below Expectations But Watch Out For 2018 Costs Ahead Of China Expansion RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - 1H17 Slightly Below Expectations But Watch Out For 2018 Costs Ahead Of China Expansion

  • RMG’s 1H17 net profit of S$32m (+0.3% yoy) came in slightly below our expectations.
  • Revenue fell 0.3% yoy on weaker flow of foreign patients and lacklustre healthcare contributions. 
  • We reduce 2017-19 net profit forecasts by 3-15% to build in elevated costs and slower ramp-up of new capacity. 
  • Maintain HOLD with a lower DCF-based target price of S$1.30 (previously S$1.52). Entry price: S$1.17.


1H17 results slightly below expectations. 

  • Raffles Medical Group’s (RMG) 1H17 net profit accounts for 45% of our full-year forecast. While 2H17 revenue and earnings are seasonally stronger (up to 55% of full year’s), we think 1H17 top-line appears weaker than expected. 
  • The weakness came from its hospital division due to softer demand from foreign patients and lacklustre healthcare contributions. 
  • Operating margin fell 0.42ppt to 16.0% in 1H17 but this was distorted by a higher wage credit in 1Q16. 
  • An interim dividend of 0.5 cent/share was declared (unchanged vs 1H16)

Managing costs well but top-line a concern. 

  • Despite the weak top-line, 1H17 net profit was relatively flat (+0.3% yoy), underpinned by a lower effective tax rate of 18% (1H16: 20%) on utilisation of tax losses. 
  • Management also controlled costs well, with lower purchases and contracted services costs. However, the growth in staff costs (+1% yoy) outpaced top-line which declined 0.3% yoy owing to recruitment of doctors and specialists ahead of the opening of RMG's hospital extension at its flagship outlet in 4Q17.


Long-term growth from China but watch out for upfront costs. 

  • The targeted completion for Raffles Chongqing is 2H18 and RMG will open the hospital in phases (starting with 300 beds out of a total 700 beds), depending on demand. The targeted completion and operation of its Shanghai hospital has been pushed to 2H19. 
  • We understand the delay is due to construction issues. In terms of recruitment, RMG is planning for 120 specialists and doctors for its Chongqing hospital in the initial phase.

Raffles Hospital Extension slated for completion by 4Q17. 

  • Raffles Hospital Extension’s completion is on track in 4Q17. This would allow the group to further raise its breadth and depth of clinical services with projected concurrent expansion in outpatient specialist centres and inpatient facilities capacity. 
  • Given the completion timing, we expect contributions to gradually ramp up in 2018. Also, the rental space will also have a rentalfree period for renovations and fittings and we expect full year contributions from 2019. 
  • In total, the group is expected to use half of the new space and lease out the remainder to tenants that include F&B or companies in complementary sectors, including pharmaceuticals.


Cut earnings ahead of elevated costs, particularly in 2018-19. 

  • We trim 2017 net profit forecast by 3% and a more significant 11% and 15% for 2018-19 respectively. This is to factor in higher upfront costs in 2018-19 ahead of its new hospitals in Chongqing and Shanghai, and a slower ramp-up of the hospitals. 
  • Closer home, we have also moderated contributions from its Singapore flagship hospital as we assume a weaker volume of foreign patients.


HOLD with a lower DCF-based target price of S$1.30. 

  • Although RMG’s expansion into China will provide capacity for long-term growth, we think near-term earnings pressure will be significant while regional competition could dampen foreign patient flows to its Singapore hospital. 
  • Our new DCF-based target price is S$1.30 (previously S$1.52). Entry price is S$1.17.


  • Potential catalysts include: 
    1. more accretive new investments in China or M&As, and 
    2. smooth launch of its new hospitals in China.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-01
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.30 Down 1.520