Raffles Medical Group - UOB Kay Hian 2018-05-02: 1Q18 No Surprises; Waiting For Inaugural Opening Of Chongqing Hospital

Raffles Medical Group - UOB Kay Hian 2018-05-02: 1q18 No Surprises; Waiting For Inaugural Opening Of Chongqing Hospital RAFFLES MEDICAL GROUP LTD SGX: BSL

Raffles Medical Group - 1Q18 No Surprises; Waiting For Inaugural Opening Of Chongqing Hospital

  • Raffles Medical Group’s (RMG) 1Q18 net profit of S$15.8m (+2% y-o-y) came in within our forecast, accounting for 24% of our full-year estimate.
  • RMG also managed costs well and maintained operating margin at 15.7%.
  • Maintain earnings estimates and BUY rating with a DCF-based target price of S$1.32 as we await execution and earnings when its new China hospitals open in the next 1-2 years.


1Q18 results within expectations, revenue growth from hospital and healthcare segments. 

  • Raffles Medical Group’s (RMG) 1Q18 net profit of S$15.8m (+2% y-o-y) came in within expectations, accounting for 24% of our full-year estimate. 1Q18 revenue improved 5% to S$120.2m, helped by the twin growth of the healthcare (+7% y-o-y) and hospital (+4% y-o-y) segments. The growth of the healthcare segment was due to more local patients and a new contract awarded by Ministry of Health and Civil Aviation Authority of Singapore. As for the hospital segment, local patient volume grew 8-9% y-o-y but the surprising data point was that foreign patients segment enjoyed 2% y-o-y growth. In terms of billing intensity, it was estimated to be relatively flat as the group made minor adjustments to inflationary price pressures.
  • Resilient operating margins on cost containment. Staff costs/turnover improved to 52.7% compared to 53.1% in 1Q17. This helped maintain 1Q18 operating margin at 15.7% (similar to 1Q17), despite the increases in inventory/consumables and purchased services.
  • Solid financials. 1Q18 operating cashflow rose 32% y-o-y to S$24.0m. As at Mar 18, its net cash balance stood at S$22.3m. However, we expect the group to revert to a net debt by end-18 as its capex picks up in the next 1-2 years.


  • China updates. The group is on track to open its Chongqing (CQ) hospital in 4Q18. The hospital will be opened in stages and the initial phase will have circa 200 beds (out of a total of 700 beds). The number of doctors required for the CQ hospital is 120 and RMG plans to have an even split of local and foreign doctors. In terms of managing costs, the group will recruit based on demand and the new doctors will join closer to 3Q/4Q18. 
  • Management reiterated its guidance that for the CQ hospital, the expected EBITDA loss is S$10m in the first year of operations, S$4m EBITDA loss in the second year and for the hospital to break even in the third year. Given that RMG’s Shanghai hospital is also expected to start with 200 beds when it opens in 2H19, the projected loss trend is similar to CQ hospital’s.
  • Limited near-term impact from changes in insurance co-pay terms. With immediate effect, new insurance policies with riders or existing policyholders’ buying a new rider will need to eventually pay at least 5% of his/her hospital bill. The latest change in regulations should not be entirely surprising as insurance premiums have surged by up to 80% for integrated shield plans and 225% for integrated plans (IP) with full riders. The reason for the sharp rise is to address the potential for “over-consumption”. 
  • We see limited near-term impact on RMG. The segment that would be impacted by this change would be its patients that rely on insurance coverage, which would exclude most of RMG’s foreign in- patients. The foreign segment accounts for circa one-third of its in-patient load and tends to have higher billing intensity. In terms of estimated split of local patients paying by insurance and non-insurance, this is estimated at 20-30% using insurance. Using 2017 pretax profit, we estimate that 12-18% of RMG’s pre-tax is exposed to the insured market.


  • Maintain earnings forecasts, which are likely to decline gradually due to new capacity. We forecast RMG’s net profit to decline gradually and likely to trough in 2019 upon the opening of its Shanghai hospital (in 2H19). Thereafter, we expect a gradual recovery (2020F net profit to rise 5% y-o-y) and the utilisation of its new hospitals in Chongqing and Shanghai would rise after the openings in 4Q18 and 2H19 respectively.


For longer-term investors, BUY with a target price of S$1.32.

  • Though RMG’s earnings outlook for the next two years is unlikely to excite, longer-term growth potential will be significantly enhanced by a near quadrupling of capacity (from around 200 to 1,300 beds when its China hospitals are fully opened in end 2019). 
  • For investors with a longer-term horizon, RMG’s relative underperformance (32% vs the FSSTI) over the past year is a good entry opportunity. 
  • Maintain BUY with a DCF-based (WACC of 5.9% and terminal growth of 2.0%) target price of S$1.32 (unchanged).


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

Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-02
SGX Stock Analyst Report BUY Maintain BUY 1.320 Same 1.320