Raffles Medical Group - UOB Kay Hian 2018-08-28: Uplifting Partnership To Boost China Prospects

RAFFLES MEDICAL GROUP LTD SGX:BSL

Raffles Medical Group - Uplifting Partnership To Boost China Prospects

Raffles Medical Group announced the signing of an MOU with China Taiping Insurance Group (CTIG), in a positive tie-up with one of the top five insurance players in China. The MOU seeks to build a partnership in health insurance provision, among other opportunities.
We have not factored the MOU into our estimates, but note that a successful execution would raise earnings.
Maintain BUY and DCF-based target price of S$1.28.

China Taiping Insurance Group (CTIG) is a Chinese state-owned financial and insurance group. Listed on the Hong Kong Stock Exchange, it has a long operating history (since 1929) with nearly 2,000 outlets and total assets of up to Rmb550b. This gives Raffles Medical Group the advantage of working with a local Chinese partner with strong experience and knowledge.

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A Raffles Medical Group and China Taiping Insurance Group joint venture will be set up to provide medical and healthcare insurance solutions to China Taiping Insurance Group’s corporate and individual customers as well as affiliates. We see potential offerings in services such as insurance product design, underwriting and claims administration, which are areas Raffles Medical Group has experience in.
In addition, Raffles Medical Group’s medical facilities and its panel of medical professionals shall be China Taiping Insurance Group’s preferred network of medical providers. We believe these initiatives are strategic in nature, aiding to develop Raffles Medical Group’s patient load for its Chongqing and Shanghai hospitals.

A strategic partnership has been established between the parties to explore the possibility of venturing into new markets as well as investment, management and/or consulting businesses for health-related real estate in China such as medical facilities, elderly homes and retirement villages. This could potentially extend Raffles Medical Group’s reach in China beyond its hospital developments.

We view the potential partnership between Raffles Medical Group and China Taiping Insurance Group very positively. Although the Memorandum of Understanding (MOU) is not binding at this stage, the potential opportunity to work with an established local insurance player in China could be the necessary spark to lift Raffles Medical Group’s China hospital developments.
By collaborating on healthcare insurance products, Raffles Medical Group can leverage on its expertise in implementing Singapore healthcare insurance to provide exclusive products for China Taiping Insurance Group customers. One such example is the “Raffles Hospital Option” from the recently implemented Raffles Shield Integrated Plan. This might inevitably increase patient load from a health insurance tie-up.

China Taiping Insurance Group has a strong presence in Sichuan province (neighbouring Chongqing municipality), with almost 10.4% of its life insurance premiums coming from the region. Its operations in Chongqing are also considerably extensive. According to China Taiping Insurance Group’s website, the number of Chongqing Life Insurance branches number is 17, more than its branches in Shanghai (10) and Beijing (10).
Raffles Medical Group’s Chongqing hospital, slated to commence operations in 4Q18, will potentially be able to gain patient referrals through this tie-up and could help drive patient volume to the hospital.

By potentially venturing into health-related real estate in China, including medical facilities, elderly homes and retirement villages, this would complement nicely with its hospital services, and provide potential cross selling opportunities in the long term.

On our latest estimates, we are still expecting a S$5m-10m EBITDA loss for Raffles Medical Group’s China hospitals in the first and second year of operations, with a gradual recovery in profits after ramp up (group’s net profit to rise to 5% y-o-y post-2020).
We have not factored in the MOU in our estimates, but note that a successful execution would raise earnings for its China hospitals.

Maintain BUY and DCF-based target price of S$1.28, implying 34.8x 2018F PE, which is slightly higher than +1SD to its mean PE of 32.9x. We believe the premium valuation is justified, given Raffles Medical Group’s strategic and long-term plans in China.
We remain upbeat on its the MOU to be a stepping stone for further collaborations.

Lucas Teng UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-28

SGX Stock Analyst Report BUY Maintain BUY 1.280 Same 1.280