Raffles Medical Group - CIMB Research 2018-01-07: A Bittersweet Remedy In China

Raffles Medical Group - CIMB Research 2018-01-07: A Bittersweet Remedy In China RAFFLES MEDICAL GROUP LTD BSL.SI

Raffles Medical Group - A Bittersweet Remedy In China

  • We expect Raffles Medical Group to incur start-up costs from the opening of the Chongqing hospital in FY18F, followed by the Shanghai hospital from FY19F onwards.
  • But gestation woes are largely priced in and its current EV/EBITDA valuation seems attractive to gain exposure to China’s healthcare potential. Maintain ADD.
  • Also a beneficiary of favourable secular trends in Singapore, like ageing population, increasing insurance coverage and heightened emphasis on primary healthcare.

Integrated private healthcare provider

  • Raffles Medical Group (RFMD) was established in 1976 and follows a “hub and spoke” model, where its network of 40–50 general practitioner (GP) clinics across the island refer patients to its specialist services and flagship hospital at Bugis.
  • The group operates in two segments – healthcare and hospital services which accounted for 44% and 56% of FY16 topline, respectively. We believe RFMD is well positioned to ride on the secular trends of an ageing population, higher insurance penetration and increasing focus on primary care.
  • Raffles Medical Group also has an Emergency Care Collaboration contract with the Ministry of Health (MOH). Its insurance arm services a broad corporate client base of over 6800, and formed c.10% of its healthcare services segment.

Muted medical tourism; overseas expansion offers growth

  • Signs of softening medical tourism have been visible since FY14, as hospital revenue growth slowed to single-digits, with foreign patients contributing c.30% of its topline.
  • Nevertheless, we remain positive on its local patient load which we think can provide a sustainable earnings base; while near- to mid-term earnings uplift could come from more clinics, full rental contribution from Holland V in FY18, and the upcoming Raffles Hospital Extension (pending the official opening in 1Q18).
  • Raffles Medical Group has also actively sought growth from overseas in recent years, starting with the acquisition of Mayo clinics, the 700-bed Chongqing hospital (2H18) and 400-bed Shanghai hospital (2H19). Such exposure should allow the group to tap into the large and underserved market, as well as their increasing healthcare spending.

All eyes on Chongqing hospital in 2018

  • We think 2018 will be the year when management executes on its Chongqing hospital.
  • We estimate a 3-year EBITDA breakeven period and S$6m-13m p.a. EBITDA loss over FY18-20F for Chongqing, assuming
    1. a measured ramp-up in hospital beds (initial 300) and
    2. gradual hiring of doctors and support staff.
  • With Raffles Medical Group’s share price decline of c.27% in 2017, and at the current valuation of 19.9x CY19F EV/EBITDA, which is close to 1 s.d. below its 5-year historical mean, China concerns appear to be largely priced in. 
  • The multi-year earnings decline attributable to the gestation of the Chongqing and Shanghai hospitals is inevitable for longer term gain, in our view.

Maintain ADD with an SOP-based TP of S$1.24

  • Raffles Medical Group remains an ADD at the current price level, especially for longer-term investors, with an SOP-based target price of S$1.24.
  • Downside risks to our Add rating are deteriorating medical tourism in Singapore, and further consensus EPS downgrades. 
  • Successful execution of its first major overseas project in Chongqing would be the key catalyst for the stock.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-01-07
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.240 Same 1.240