Raffles Medical Group Ltd – Pressure points everywhere

 

 

The Positive

+ Healthy cash flow. The net cash continues to grow at S$239mn (2Q23: S$230mn). Cash continues to pile up after the completion of the hospitals in China. Capex has collapsed from a peak of S$96mn in FY19 to S$25mn last year.

 

 

The Negatives

- Revenue is down sharper than expected. We believe the drag in revenue came from lower pandemic-related vaccination and test service at the clinics and centres and softer foreign patient revenue. Revenue at the GP clinics is normalising back to pre-pandemic levels. Foreign patient volumes are below expectations due to the rising cost in Singapore.

 

- Margins collapsed. Margin weakness was from the loss of high-margin vaccination and testing services. Other expenses such as utilities and staff cost continue to climb. There were only moderate price increases during the period.

Raffles Medical Group Ltd – Margins still at record levels

 

 

The Positives

+ Resilient hospital services revenue and margins. Hospital services enjoyed growth from increased foreign patients, which are 70-80% of pre-pandemic level. Patients from Vietnam and China have not returned to pre-pandemic levels. Operating margins in 1H23 was 20.7%, higher than pre-pandemic levels of around 16%. The company managed to lower staff costs by S$34mn or 17% YoY by reducing part-time workers. Meanwhile, 1H23 PBT margin is also supported by S$4.6mn improvement in net finance income.

 

+ Healthy FCF* with lower capex cycle. 1H23 FCF remains strong at S$111mn (1H22: S$117mn), driving up net cash to S$230mn (1H22: S$135mn). Annualised capex is trending towards S$30mn. This compares to S$45mn p.a. over the past three years.

*Free cash flow = Operating cash-flow less Capex less Lease payments

 

The Negative

+ China is still a drag. Despite revenue growth of 16% YoY in 1H23, China continues to experience operating losses. The losses are estimated at between S$12mn and $14mn. The next few years are the investment phase to build brand awareness of the hospital amongst the locals. We believe locals still prefer government hospitals for their perceived pool of more experienced doctors.

 

Outlook

We expect 2H23 to be stable supported by the inflow of foreign patients and higher prices. Meanwhile, headwinds will stem from loss of COVID-19 PCR tests and lower margins for TCFs. Insurance will also continue suffering losses as claims rebound with the increase of more insured patients. During the pandemic, patients generally avoided the hospital if the illness was less serious.

Raffles Medical Group Ltd – Policies, immunity debt, tourism helped

 

 

 

 

The Positives

+ Spike in healthcare services earnings. 2H22 PBT for healthcare services more than doubled to S$97.8mn. The jump was due to higher GP visits as re-opening saw a jump in non-COVID infections. In addition, patients with COVID-19 symptoms preferred GP visits rather than hospitals. Increased volumes boosted operating leverage for the business.

+ Return of foreign patients. With borders re-opening, revenue from foreign patients has returned to close to pre-pandemic levels. Such patients have higher revenue intensity and better margins. We expect the return of foreign patients to continue into 1H23. We believe foreign patient revenue has surged back to around 20% of revenue. This is below the estimated 25-30% pre-pandemic.

+ Jump in FCF*. In line with the record earnings, FCF rose 51% to a record S$183mn for FY22. Capital expenditure should normalise to S$30mn-35mn after the major ramp-up of the past 3 years for the new hospitals in China. Net cash has doubled from S$90.7mn to S$180mn. FY22 dividend was increased by 36% to 3.8 cents.

*Free cash flow = Operating cash-flow less Capex less Lease payments

 

 

The Negative

+ Losses in China hospitals. EBITDA losses in China were larger than expected due to the lockdown. There was vaccination work, but revenue was low. The decline in foreigners was another negative, especially for the Beijing hospital.  We expect S$10mn EBITDA loss per hospital for Chongqing and Shanghai.

Raffles Medical Group Ltd – Huge earnings beat from foreign patients and electives

 

The Positives

+ Resilient revenue despite less COVID related revenue. Revenue expanded 11% YoY despite the decline in PCR testing services. Growth in 1H22 was driven by (i) higher foreign patients, now 60% of pre-pandemic levels; (ii) return of elective treatments especially from elderly patients that had avoided hospitals during the pandemic; (iii) more GP clinic visits from more unmasked events and greater brand awareness. The number of GP visits exceeds pre-pandemic levels; (iv) COVID-19 related revenue was resilient with vaccinations still underway and higher patient load at the CTFs.

+ Surge in operating margins. Operating margins surged 6% bps to 22.6%. Staff cost rose a slower 7% YoY and purchasing cost was down 23%. We believe the margin pick-up was due to higher revenue intensity from foreign patients.

+ Growth in China despite lockdown. Revenue in China rose 5% supported by Chongqing hospital volumes. Raffles hospitals in China are gaining more recognition, especially from the targeted upper middle income households. The Shanghai hospital was opened but lockdown affected the flow of patients and staff availability.

+ Surge in operating cash flow. 1H22 free cash flow jumped S$80mn YoY to S123mn, due to higher profits, a decline in receivables and lower CAPEX. Net cash improved by S$100mn YoY to S$134mn as of June 2022.

 

The Negative

- Nil.

 

Outlook

We expect 2H22 revenue to be resilient, supported by foreign patient admissions, return of elective treatments, price increases and increased visits to GP clinics. The revenue drag will come from lower COVID-19 related services such as vaccination, testing and CTF. We believe losses in China will persist as Shanghai operations ramp up capacity and cost.

 

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We raised our FY22e earnings by 60%, with an 18% increase in revenue and a 5% point increase in margins.  Our WACC was also nudged up by 0.4% points to 7.5% to account for the higher risk-free rate.

Raffles Medical Group Ltd. – Downtime ahead

 

The Positives

+ Pandemic services driving growth. 2H21 revenue jumped 54% YoY. Driving growth were COVID-19-related services such as vaccinations, PCR swab tests and management of community treatment facilities. Contribution from COVID-19 services was not disclosed. However, peer hospitals' contribution from COVID-19-related services is around 20%. Another revenue driver was China, up 33%, but contribution was only 7% of 2H21 revenue.

+ Record cash flows. Free cash flow generated during the year was a record S$110mn (FY20: +S$74.3mn). Net cash improved to S$91mn from S$32mn a year ago. A dividend of 2.8 cents is a 60% payout ratio or S$50mn cash outlay.

 

The Negative

- Rising staff cost. Staff cost jumped 32% YoY in 2H21 to S$204mn. Staff cost as a percentage of sales in FY21 is around 53.5%. This compares with the pre-pandemic level of 51%. We expect staff costs to remain elevated due to labour shortage and tougher operating conditions. Other cost pressures are from personal protective equipment (such as masks, gowns, etc). The impact of rising electricity costs is less significant. There is a need to raise prices by 3-5% to offset some of these higher costs.

 

Outlook

We expect earnings to be weaker in FY22e:

 

Maintain NEUTRAL with a lower TP of S$1.27, from S$1.35

Our FY22e earnings are cut by 8% and our DCF valuation WACC is nudged up from 6.8% to 7.1% due to a higher risk-free rate assumption. 

Raffles Medical Group Ltd-Convalescing

The Positives

+ Strong healthcare services

Income grew 20% YoY in FY20, faster than the +6% in 1H20. Apart from offering air border screening and testing of foreign workers in dormitories in 1H20, the Group introduced new services such as PCR and serology testing in 2H20 as part of the national effort to combat COVID-19.

+ Hospital services stable with new patients

Despite loss of foreign patients due to travel restrictions, revenue from hospital services was resilient with new patients after Singapore exited its circuit breaker. As countries roll out vaccination programmes, we expect a gradual recovery in foreign patient load.

The Negatives

- Operating expenses rose on higher staff costs

Staff costs increased 9.3% YoY from S$267mn to S$291mn due to manpower intensity during COVID-19. JSS income of S$28mn in FY20 minimised the impact on earnings. With wage support tapering off by 1H21 and RafflesHospitalShanghai’s gestation, costs are expected to continue creeping up in FY21e.

Outlook

China operations back in action

The performance of RafflesHospitalChongqing improved in FY20 from FY19 despite a challenging operating environment. It remains on track to break even in FY21 as China has contained COVID-19 swiftly.

The Group completed upgrading work at RafflesHospitalBeijing to support inpatient services and offer minimally-invasive surgeries. This is expected to boost profitability.

The opening of RafflesHospitalShanghai has been delayed. It will open by mid-FY21. We expect narrower EBITDA losses than RafflesHospitalChongqing due to the existing presence of Raffles Medical’s clinics in Shanghai. Being a more cosmopolitan city with a bigger expat presence, demand for private healthcare in Shanghai is expected to be higher.

Recommendation

Upgrade to ACCUMULATE with higher TP of S$1.18, from S$0.94

While revenue growth is expected to be healthy in FY21, we lower earnings by 10% to factor in RafflesHospitalShanghai’s gestation in 1H21 and the higher expenses related to expanded businesses.

We also roll forward our DCF (WACC 6.6%) valuation to include FY23e free cash flows, when we expect Chongqing to turn profitable and Shanghai to break even.

Raffles Medical Group Ltd – Near-term pain extended by COVID-19

 

 

The Positives

+ Healthcare Services saw revenue grow 6.8% YoY from S$116.6mn to S$124.6mn in 1H20 as the Group rendered services to assist the government’s effort to tackle the COVID-19 pandemic, providing an alternative sources of income. These included providing air-border screening at Changi Airport, swabbing of foreign workers at the dormitories, as well as providing medical services to COVID-19 patients at the Changi Exhibition Centre-Community Care Facility.

 

The Negatives

- Hospital Services fell 5.4% YoY from S$148.1mn to S$126.6mn on business disruptions across China and Singapore. Initial outbreak of COVID-19 in China saw operations in China affected in 1Q20. This was followed by the 2-month Circuit Breaker in Singapore with non-essential activities (including services such as dental and health-screening) mandated to cease, hurting the Group’s business momentum in 1H20. As a result, Group revenue declined from S$255.3mn to S$241.4mn (-5.4% YoY) in 1H20.

- Operating margin was lower (1H20: 10.0% vs. 1H19: 13.6%) due to higher staff costs (+4.8% YoY) and purchased and contracted services (+24.0%). To support manpower demands from COVID-19-related projects with the government, the Group incurred higher outsourced recruitment agency costs as well as salaries from hiring of temporary staff. The increased costs were partially offset by government grants such as the Job Support Scheme (JSS), higher wage credit and property tax rebates. Nevertheless, operating profit fell 30.2% YoY to S$24.3mn (1H19: S$34.8mn).

 

Outlook

Gradual return to normalcy observed across operating geographies. Raffles Medical has started to observe return of patient load in 3Q20 to pre-COVID-19 levels as both China and Singapore started to ease restrictions on businesses. As cross-border travel begins to ease, Hospital Services is likely to recover, as foreign patients make up 20 to 30% of revenue in Singapore. Margins will also revert to previous levels as contribution from in-patient services pick up. 

 

Setback to operations in China

RafflesHospitalChongqing (RHCQ) was slated to breakeven in FY21. However, the hospital saw less patient load in 1H20 with travel restrictions. As a result, the Group expects breakeven to be delayed by up to a year, prolonging gestations period and cost. RafflesHospitalShanghai is currently in the final stages of out-fitting and is expected to begin operations at end-FY20. However, this is barring further delays should the COVID-19 situation take a turn for the worse.

 

Maintain NEUTRAL with revised TP of S$0.94 (previous TP S$0.99).

We revise our FY20e earnings estimate downwards by 25% after considering the slowing business momentum in 1H20. However, we expect business to recover by FY21. The current shift in business dynamics does not represent the nature of the Group’s business in a steady-state environment as Hospital Services segment was depressed from business restrictions during the pandemic. We expect business momentum from Hospital Services segment to return gradually with healthier margins moving forward.

Nevertheless, the Group has maintained strong cash position and distributed 0.5 cents in interim dividends for 1H20, steady from a year ago. The Group is expected to remain profitable for the remaining of FY20.

Raffles Medical Group Ltd – Ready for hurdle-crossing

 

The Positives

+ Sustaining strong revenue growth. Healthcare Services revenue grew 9.0% YoY as the company expanded its network of corporate clients and increased the scope of services on both existing and new insurance contracts. A higher patient load also led to a 5.9% growth in the Hospital Services division YoY. Revenue growth has experienced 8 consecutive quarters of growth and is expected to buck the trend in 2020 with expected opening of RafflesHospital Shanghai during the year.

+ Recorded strong cash position of $150.7mn (+43% YoY). Strong cash flow from operations boosted group’s financial position despite payment of $98.5mn for fixed assets under development and capital expenditure incurred in 2019. Together with existing un-used credit facilities, the group has built up sufficient capital buffer to see through short-term uncertainties.

 

The Negatives

- Pressure from gestation losses in China remain. Despite EBITDA growing a modest 2.8% YoY, gestation losses continue to weigh in on earnings. RafflesHospital Chongqing incurred $9.2mn of gestation losses for FY19, resulting in in a NPAT decrease of 14.5% YoY by the group to $9.2mn. Nevertheless, the group is tracking the previously estimated EBITDA losses.  Gestation losses from RafflesHospital Chongqing is expected to narrow to $4 – 6mn in FY20 but slated opening of RafflesHospital Shanghai will likely offset decrease in EBITDA losses.

 

Outlook

Uncertainty arising from Covid-19 outbreak on earnings. Patients may delay elective treatments, causing a short-term drag on revenues in the immediate quarter. This precludes prolongation of the virus outbreak.

 

China – Chongqing and Shanghai hospitals

Apart from narrowing gestation costs, RafflesHospital Chongqing has also obtained approval to be covered under Yibao, China’s social health insurance scheme. The expansion in scope for Yibao coverage to include cash top-ups as co-payments will allow the hospital to have flexibility in opening up more beds capacity to cater for increased demand without compromising on margins.

RafflesHospital Shanghai’s opening was slated in 2Q20. However, with the Covid-19 outbreak, opening of the hospital might be delayed until normalcy returns. This may extend gestation period and increase related costs. Nevertheless, with a higher expatriate population covered under commercial insurance, the hospital may also observe faster filling of capacity as utilisation will be less contingent on acquisition of Yibao coverage.

 

Maintain NEUTRAL with revised TP of S$0.99 (previous TP S$1.05).

China will continue weighing on the Group’s business in the next 1-2 years. Short-term headwinds arising from the Covid-19 may also reduce patient load from the delay in elective treatments. This may cause strain on revenue to similar extent as the 2003 SARS outbreak which saw 2 quarters of business slowdown.

Raffles Medical Group Ltd – China remains an earnings drag

 

The Positives

 

The Negative

 

Updates

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.

Raffles Medical Group Ltd – China’s gestation costs within expectations

 

The Positives

 

The Negative

 

Updates

China – Chongqing and Shanghai hospitals

Management maintained EBITDA loss guidance for both 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 2 January 2019 and is currently operating 24/7 and staffed by a team of multi-disciplinary international and local doctors. The hospital started with 150 beds with the potential to be a 700-bed hospital. It is located in the New North District of the Liangjiang New Area.

 

RafflesHospital Shanghai should commence operations in January 2020. 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 an unchanged TP of S$1.09

The Group’s bet on China is to leverage on the massive population size and rising affluence of its people. 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.

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