Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-09-21: Upgrade To Buy On Long-term Growth

Raffles Medical Group (RFMD SP) - UOB Kay Hian 2017-09-21: Upgrade To Buy On Long-term Growth RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group (RFMD SP) - Upgrade To Buy On Long-term Growth

  • While earnings outlook for the next two years will likely be crimped by start-up losses in China, we believe growth over the next 10 years will be significantly enhanced where capacity will more than quadruple. 
  • Since our downgrade in April, Raffles Medical's share price has declined nearly 22% on expansion cost concerns. Raffles Medical Group (RMG) is trading at a 2018 15% discount to regional peers. This could be an accumulation opportunity for investors with a horizon of three years or more. 
  • Upgrade to BUY with a DCF target price of S$1.28.


Upgrade to BUY with a new target price of S$1.28 on steep share price decline and long-term growth. 

RMG is trading at an undemanding valuation compared to peers. 

  • RMG is trading at 31x 2018F PE, which is inexpensive as peers are trading at 36x. 
  • While we note that RMG is trading at around +1SD to its long-term mean of 26x, we believe that it is justified, given that long-term growth over the next ten years will be significantly enhanced during which capacity will more than quadruple (from around 200 to 1,300 beds).


Raffles Chongqing on track, long-term growth from One Belt One Road. 

  • Raffles Chongqing is targeted for completion in 2H18. We understand that the hospitals will be opened progressively in phases, where 150-180 beds (of the 700-bed capacity) will be initially opened and ramped up as demand picks up. 
  • As for doctor recruitment, we expect it to commence in the beginning of 2018, where around 12 specialists will be posted to the hospitals as medical leaders. Furthermore, we expect the group to target for 50% locally hired doctors in China. 
  • With a capacity of 700 beds, we anticipate strong long-term growth potential for Raffles Chongqing, underpinned by the One Belt One Road initiative and rising affluence in the region.

What quantum of start-up losses should we expect? 

  • In terms of upfront costs for both Chongqing and Shanghai, we expect them to be well managed. 
  • Unlike IHH’s Gleneagles Hong Kong (GHK) where all 500 beds were opened at one go, both Raffles Chongqing and Shanghai will be opened in phases, which allows revenue growth to be more closely matched with costs and hence facilitate a faster rate of breakeven. 
  • Based on our forecasts, we estimate start-up losses (EBITDA) for Chongqing at S$14m in 2018 and S$9m for the smaller capacity Raffles Shanghai in 2019 when it opens in the second half.


Sanity check against Gleneagles Hong Kong. 

  • As a sanity check, we referenced GHK, where we note the hospital incurred total pre-opening and start-up losses of c.S$66m over a one year period (Jun 16-Jun 17). Adjusting for the phased bed openings and applying a 20-30% discount due to cheaper cost of operations and labour in Greater China, we deem our one-year start-up loss estimates of S$9m and S$14m for both Shanghai and Chongqing reasonable.

Declining medical tourist numbers but supported by local patients and hiring of more specialists. 

  • Medical tourism in Singapore continues to be weak, where the group experienced a low single-digit percentage decline in the number of foreign patients in 2Q17. We acknowledge this trend, but believe patient load will continue to be well-supported by growth in local patients, especially given favourable demographic trends such as rising affluence and an ageing population. 
  • Furthermore, we believe the group is stepping up efforts to hire more specialist doctors in order to enhance centres of excellence, which will help attract medical tourists looking for more premium and quality services.


Cut 2018-19 net profit forecasts by 14% and 26% respectively. 

  • We estimate total start-up losses (EBITDA) for both China hospitals at S$14m and S$21m for 2018-19 respectively. 
  • Adjusting for the estimated start-up losses, we reduce our 2018-19 net profit forecasts by 14% and 26%.


  • Upgrade to BUY for long-term growth with a lower DCF target price of S$1.28 on our downward earnings forecast revision, offset by an increase in our terminal growth assumption to 3% (from 2.5%) on a stronger long-term growth outlook. 
  • Although RMG’s earnings outlook for the next two years is likely to be dampened, the group’s runway for long-term growth will be significantly enhanced over the next 10 years, given a near quadrupling of capacity (from around 200 to 1,300 beds when its China hospitals are fully opened). 
  • Upgrade to BUY with a lower DCF-based target price of S$1.28 (previously S$1.30).


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

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-21
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 1.28 Down 1.300