Raffles Medical - RHB Invest 2019-04-29: Here Come The China Start-Up Costs


Raffles Medical - Here Come The China Start-Up Costs

  • Maintain NEUTRAL and SGD1.02 Target Price, 5% downside, 2.3% dividend yield.
  • RAFFLES MEDICAL GROUP LTD (SGX:BSL)'s 1Q19 PATMI came in at SGD13.6m, down 14% y-o-y. This makes up 22.8% of our full-year estimate, in line with our expectation.
  • The major decline was largely due to the start-up costs for the Chongqing hospital, which commenced operations in end-2018. Management maintained its guidance that each of its China hospitals would make an EBITDA loss of SGD8-10m (c.9% of 2018 EBITDA) in the first twelve months of operations.

Expect Chongqing losses to narrow as revenue ramps up over the next three quarters.

  • According to management, the bulk of the fixed costs for the Chongqing hospital have been recognised in 1Q19. As such, we believe the minimum operational fixed costs have been put in place, and we expect a similar run rate for the next three quarters of Chongqing operational expenses.
  • Management also said it would only put in more capacity after revenue has expanded. However, we note that interest expense would creep up as the group draws down the remaining 40% for payment across FY19F. Raffles Medical has currently drawn down 60% of the debt (SGD84m out of SGD140m) for the Chongqing hospital.

In Singapore, revenue for healthcare services grew 9% while hospital services revenue grew 3%.

  • The healthcare services segment grew faster due to the onboarding of new corporate and government agency clients over the last year.
  • Revenue from the hospital services segment was largely driven by growth in local patient load. Foreign patient revenue remained stagnant in 1Q19.

Still NEUTRAL on the stock

  • Still NEUTRAL on Raffles Medical as the Shanghai hospital is expected to complete by the end of the year, leading to another round of gestation phase for the group.
  • Key downside risks include further escalation of costs and a slower-than-expected ramp-up in the Chongqing hospital’s patient load.
  • Upside risks include faster-than-expected turnaround in its China operations and higher-than-expected rental income from the letting of unutilised space in its Raffles Hospital extension in Singapore.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-29
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.020 SAME 1.020