Raffles Medical Group Ltd - China remains an earnings drag

4 Nov 2019
  • 3Q19 Revenue and PATMI were in line with our estimates.
  • 3Q19 PATMI dropped 16.9% YoY due to gestation costs from RafflesHospital Chongqing. Excluding China, net earnings would have risen by 4.8% YoY.
  • RafflesHospital Chongqing’s 3Q EBITDA loss of $2.6mn was within expectations.
  • We keep our NEUTRAL recommendation with a lower TP of S$1.05 (previous TP S$1.09). Earnings will be under pressure from the gestations costs for RafflesHospital Chongqing in 2019 and RafflesHospital Shanghai in 2020.


The Positives

  • Healthcare services (e.g. GP clinics) underpinned revenue growth. 3Q19’s healthcare services revenue grew 9.5% YoY, boosted by the Group’s expansion of its insurance and corporate client base.
  • Hospital services gaining patient load with expanded facilities. 3Q19’s hospital services revenue grew 7.0% YoY due to the growth in patient volume, mainly from local patients while foreign patient load growth remained flat.
  • Staff costs well managed. Despite ramping up operations in China, staff costs remained relatively well contained at 52.0% of revenue (rising 0.5 pp from a year ago), not far from the Group’s 5-year historical average of 50.6%. We expect staff costs to continue rising especially with the completion of the RafflesHospital Shanghai building, recruitment of staff for the new hospital has commenced this quarter.


The Negative

  • Margins to remain under pressure. Excluding RafflesHospital Chongqing’s EBITDA loss of S$2.6mn this quarter, EBITDA margin would have risen to 20.6% instead of decreasing 1.4pp to 18.4%. However, 9M19 EBITDA loss from RafflesHospital Chongqing totalled S$6.6mn, at the lower end of management’s full-year EBITDA loss guidance of S$8-10mn for RafflesHospital Chongqing in the first year.



China – Chongqing and Shanghai hospitals

Management maintained EBITDA loss guidance for each of the hospitals of S$8-10mn in the first year and S$4-5mn in the second year before breaking even in the third year of operation.

RafflesHospital Chongqing commenced operations since January 2019 and is now operating round the clock and staffed by a team of multi-disciplinary international and local doctors. The hospital has the potential to be a 700-bedder and is located in the New North District of the Liangjiang New Area. The hospital is currently in negotiation with the authorities to allocate 100 out of the 700 beds for the yibao insurance (local medical insurance).

RafflesHospital Shanghai’s building structure was completed in May 2019. The interior fit-out and purchase of major equipment are now underway. Recruitment of the hospital opening team has also begun. Operations should commence in 1H20 and it will be a 400-bed tertiary hospital located between Shanghai Pudong International Airport and Shanghai Hongqiao International Airport in the heart of Pudong New Bund, a free trade zone.


Maintain Neutral with a lower TP of S$1.05 (previous TP S$1.09).

The Group’s bet on China is to leverage on the massive population size, rising affluence of its people as well as rising demand for private healthcare. However, the key risks to our forecasts are longer than expected gestation period and margin pressures if the Group is unable to scale patient volumes in China. With proper and delicate execution, the China venture could bring long-term growth prospects for the Group.

Potential re-rating catalysts: (i) Stronger demand from the MOH partnership; (ii) Shorter than expected gestation period in China hospitals; (iii) higher investment-holding revenue growth with the remaining 80% of vacant spaces leased out.

About the author

Tin Min Ying
Research Analyst
Phillip Securities Research Pte Ltd

Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.

She graduated with a Bachelor of Accountancy with a major in Finance from SMU.

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