Raffles Medical Group - UOB Kay Hian 2018-08-07: 1H18 In Line; Upside From China Expansion & Insurance

Raffles Medical Group - UOB Kay Hian Research 2018-08-07: 1h18 In Line; Upside From China Expansion And Insurance RAFFLES MEDICAL GROUP LTD SGX:BSL

Raffles Medical Group - 1h18 In Line; Upside From China Expansion And Insurance

  • Raffles Medical Group’s 1H18 net profit of S$32.7m (+1.2% y-o-y) was in line with our expectations.
  • Management continues to execute well in containing costs in view of the modest growth in top-line. We are upbeat on its move to offer more new insurance products, given the synergies.
  • Maintain BUY on Raffles Medical Group and DCF-based target price of S$1.28.


1H18 results in line with expectations, accounting for 50% of our full-year forecast.

  • Raffles Medical Group’s (RMG) 1H18 net profit of S$32.7m (+1.2% y-o-y) accounted for 50.4% of our full-year estimate. Although 2H earnings are typically seasonally stronger (accounting for 52.3-54.4% of full-year earnings in previous years), we are mindful of the impending start-up costs for Raffles Chongqing hospital (CQH), which are expected to rise from 3Q18. 1H18 operating margin improved slightly to 16.3% (1H17: from 16.0%). An interim dividend of 0.5 S cent/share was declared (unchanged y-o-y).

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Strength in managing costs; softer demand from foreign patients.

  • Raffles Medical Group’s 2Q18 revenue was flat (+0.1% y-o-y), aided by effective cost management. This was mainly due to staff cost (-2.4% y-o-y) which RMG is containing it well. However, we do expect staff cost to rise from 3Q18 as CQH opens in 4Q18. 
  • Revenue for healthcare services increased 5.4% y-o-y, offset by a 2.3% y-o-y dip in hospital services. The healthcare services segment was once again supported by the addition of new corporate clients, while the hospital services segment registered a slight increase in local patients, circumventing a softer demand from foreign patients. 
  • Foreign patient volume continues to be under pressure on the back of higher Singapore dollar (vs regional currencies), and higher treatment and ancillary costs in Singapore.


Long-term growth from China; tracking hospital utilisation.

  • Raffles Chongqing hospital is progressing on track and slated to open in 4Q18. Management has guided that the recruitment of international and local physicians as well as senior hospital management staff has begun with a positive response. 
  • Starting with a mix of local doctors as well as doctors currently in service, CQH is slated to open with 60 specialists and doctors, and ramping up to 120 in its first year of operations.

Health insurance as a strategic avenue.

  • Recent tie-ups in the health insurance market also provide good opportunities for RMG, allowing an avenue to scale up its local operations. These include entry into the integrated shield plan (IP) market, making it the seventh MediShield player in the market, in addition to a partnership with NTUC Income, offering policyholders access to a panel of specialists at Raffles Hospital. We understand the potential IP revenue is S$10m-12m, with a target of new 25,000 policyholders in the first year. 
  • We are positive of Raffles Medical Group’s move to scale up its insurance segment and this could be an avenue to consider in China when Raffles Medical Group’s Chongqing and Shanghai hospitals open in 4Q18 and 2H19 respectively.

Specialist centre extension filling up.

  • The extension will have 25,000sf of commercial space and the retail outlets are filling up fast. Advance negotiations are underway to bring in medical-related tenants for the remaining commercial space. Some of the specialties which have commenced operations in the new wing include its orthopaedics and Children Centre.


Earnings unchanged.

  • We conservatively assume net profits to decline 9-10% in 2018- 19 before a gradual recovery of 3-5% growth in 2020-21. 
  • Despite the lack of near-term earnings visibility, any weakness could be an entry level for longer-term investors, given Raffles Medical Group’s major expansion into China’s healthcare industry.


  • Maintain BUY and target price of $1.28, based on DCF (WACC: 6.1%, terminal growth: 2.5%).


  • Potential catalysts include:
    1. strong pick-up in tenant occupation from specialist extension, and
    2. the launch of its new hospitals in China.

Andrew Chow CFA UOB Kay Hian Research | Lucas Teng UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-07
SGX Stock Analyst Report BUY Maintain BUY 1.280 Same 1.280