Raffles Medical Group - OCBC Investment 2019-10-29: 3Q19 Drag From Gestation Losses

RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - 3Q19 Drag From Gestation Losses

Raffles Medical Group's 3Q19 earnings dragged by gestation losses at Raffles Hospital Chongqing.
Shanghai hospital launch expected in 1H 2020.
Subdued near term outlook, with time needed to execute on its China growth story.
Fair value reduced to SGD1.02.

As a leading integrated private healthcare provider operating in 14 cities across Asia, RAFFLES MEDICAL GROUP (SGX:BSL) aims to capture further growth from the Chinese healthcare market, where it has just opened the Raffles Chongqing hospital in January 2019 and plans to open Raffles Shanghai hospital late this year.
Near term we believe Raffles Medical share price is likely to stay range-bound given time needed for the new projects to stabilize. momentum at its new Chongqing hospital is expected to improve over time, driven by increasing patients from nearby Chinese cities such as Chengdu and Guangzhou.

Raffles Medical Group's 3Q19 group revenue grew +7.8% y-o-y to SGD130.5mn, led by healthcare services (+9.5%) and hospital services (+7%) as patient load increased. EBITDA grew 1.4% to SGD24.3mn from a year ago. See Raffles Medical Announcements.
3Q EBITDA margin of 18.6% fell from 2Q’s 19.7%. Net profit after tax for 3Q fell 15.8% to SGD13.6mn due to Raffles Hospital Chongqing (RHCQ) gestation losses. Excluding RHCQ, group EBITDA increasesd 12.1% y-o-y while net profit grew 4.8%.
Raffles Medical Group closed the quarter with cash position of SGD116.9mn. Overall 9M19 net profit declined 14% from a year ago.

Following the completion of building structure of Raffles Hospital Shanghai in May 2019, interior fit out, equipment purchase and recruitment of the hospital’s opening team is ongoing. Expected launch for the Shanghai hospital has been updated to be phased starting 1H 2020 (vs prior guidance for early 2020).

Despite gestation losses for Chongqing and the expectation for inpatient momentum to be gradual (proposed partnership with Chinese public health insurance is not yet formalised), management expects the group to remain profitable in 2019. Chongqing is now operating 24 hours and staffed by a team of multi disciplinary international and local doctors (~100 beds with 200 staff). 3Q startup losses at the EBITDA line was about SGD2.6mn, with 4Q trend likely to be similar.

Raffles Medical share price last trades close to its 5Y historical average PER multiple of 30.3x. While we see growth potential from its expansion plans in China over the medium term, near term catalysts appear limited given gestation time required for ramping up its new facilities in China (Chongqing and Shanghai hospitals). See Raffles Medical Target Price; Raffles Medical Dividend History.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.02 DOWN 1.060