• FY22 revenue was within expectation, but PATMI was a massive beat. FY22 revenue and PATMI were 102%/143% of our estimates. The jump in healthcare services earnings was higher than expected.
• The drop in COVID-19-related revenue was offset by higher margin foreign patients, more elective surgeries, increased GP clinic visitations and additional bed capacity in Changi under the Transitional Care Facilities (TCF).
• The re-opening of borders and relaxation of social restrictions triggered the return of medical tourists. There was a wave of other infections raising the volumes at GP clinics and TCFs. We expect the TCF to be operational until public hospital capacity is meaningfully increased. Our BUY recommendation is maintained. FY23e earnings forecast is increased by 50% to S$142mn and our DCF target price raised to S$1.76 (prev. $1.46) with a higher discount rate to 8.0% (prev. 7.6%) as the risk-free rate was lifted.

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.

• 1H22 revenue/PATMI beat our estimates at 60%/95% of our FY22e forecast. 1H22 PATMI rose 51% YoY to $60mn. Earnings beat came from the recovery in foreign patients, return of elective treatments and more resilient COVID-19 related revenue.
• Revenue in China rose 5%, driven by Chongqing hospital, while Shanghai was negatively impacted by a two-month lock-down in 1H22. Raffles has also received approval to set up an In-Vitro Fertilisation centre in Hainan, to be operational in 1Q23.
• We raised our FY22e earnings earning by 60% to S$100mn. The uncertainty and lack of visibility in COVID-19-related services will cause the largest swing in our forecast. The major earnings drivers in 2H22 will be foreign patients, elective surgeries from local patients, increased visits at the GP clinics and higher prices. Weakness will come from lower COVID-19 testing and vaccination and fewer patients in COVID-19 treatment facility (CTF). With the increased earnings, our DCF is raised from S$1.27 to S$1.46. We also raised our discount rate to 7.5% from higher risk-free assumptions. Our recommendation is raised from NEUTRAL to BUY.

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.

Upgrade to BUY with a higher TP of S$1.46 (prev. S$1.27)

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.

• FY21 revenue/PATMI beat our estimates at 104%/111% of our forecast. Earnings beat from higher-than-expected COVID-19-related services and government grants.
• FY21 dividend of 2.8 cents is a 12% improvement from a year ago.
• We expect FY22e to be a weaker year for the company. COVID-19-related services are expected to decline, full-year losses from RafflesHospitalShanghai and a slower recovery in foreign patients. Foreign patient volume may be softer than pre-pandemic levels due to regional competition and substitution with local healthcare. Our DCF is lowered from S$1.35 to S$1.27. We raised our discount rate from higher risk-free assumptions and cut FY22e earnings by 8%. Our NEUTRAL recommendation is maintained. There will be some downtime in earnings until volume from foreign patients recovers and hospitals in China achieve scale and profitability.

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:

• COVID-19-related services will decline from reduced PCR swab tests and fewer vaccination programmes;
• Recovery in foreign patient volumes will be slower despite borders re-opening. Foreign patients have diverted to neighbouring countries such as Malaysia and Thailand, where prices are more competitive. Foreign patients are also converting to their local healthcare facilities.
• We expect losses in China to widen further from an estimated EBITDA loss of S$12mn in FY21 to S$18mn in FY22e. Full-year operations of RafflesHospitalShanghai is the main cause for the widening losses. Since its July 2021 opening, the hospital has operated only at a limited scale, as it is dependent on licensing and arrival of equipment.

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. 

• FY20 earnings beat estimate by 61% with the variance coming from S$28mn of JSS income and new COVID-19-related services.
• Healthcare services grew 18% YoY as PCR and serology testing offset loss of foreign patients due to travel restrictions.
• China operations improved from FY19. RafflesHospitalChongqing narrowed losses. Completion of RafflesHospitalBeijing’s upgrading to accelerate growth in China.
• Upgrade from NEUTRAL to ACCUMULATE with higher TP of S$1.18 from S$0.94, as we roll forward our DCF (WACC 6.6%) valuation. China operations expected to turn around.

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.

• 1H20 revenue was below initial estimates by 9% due to impact from COVID-19 resulting in slower business momentum.
• Decline in Hospital Services (-5.4% YoY) partially offset by better Healthcare Services (+6.8% YoY) due to the Group’s support of the government’s COVID-19 initiatives in Singapore.
• Halt in hospital and clinic operations in China during 1H20 as a result of the COVID-19 outbreak expected to set the Group’s breakeven timeline back by up to a year.
• We maintain our NEUTRAL recommendation with a lower TP of S$0.94 (prev S$0.99). We revise our FY20e earnings downwards by 25% taking into account pressure from slowing business momentum observed in 1H20.

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.

• 4Q revenue grew 6.7% YoY, in line with estimates. Full year contribution from both Healthcare Services and Hospital Services divisions grew at healthy levels of 8% YoY and 5.0% YoY respectively.
• FY19 EBITDA grew a modest 2.8% YoY despite drag from gestation costs related to opening of RafflesHospital Chongqing.
• Covid-19 outbreak may cause delay to the opening of RafflesHospital Shanghai, possibly extending gestation period.
• Despite investment in China, RFMD maintains a strong net cash position of $150.7mn
• We maintain our NEUTRAL recommendation with a revised TP of S$99. Near-term drag on business is likely but recovery expected to be swift on intact long-term positive outlook.

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.

• 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.

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.

• 2Q Revenue and PATMI were in line with our estimates.
• PATMI plunged 16.3% YoY due to gestation costs from RafflesHospital Chongqing. Excluding China net earnings would have risen 9.3% YoY.
• RafflesHospital Chongqing’s 2Q EBITDA loss of $2.3mn was within expectations.
• Interim ordinary dividend maintained at 0.5 Singapore cents per ordinary share.
• We keep our NEUTRAL recommendation with an unchanged TP of 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. 2Q healthcare services revenue grew 7.4% YoY, boosted by the Group’s expansion of its insurance and corporate client base.
• Hospital services gaining momentum with expanded facilities. 2Q hospital services revenue grew 3.4% 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 well contained at 50.7% of revenue, in line with the Group’s 5-year historical average of 50.6%. The Group expects to spend more on marketing in China during the ramp-up period to attract more corporate customers. In addition, operating costs in China were lower than expected, giving scope for price discounts or greater margins.

The Negative

• Margins to remain under pressure. Excluding RafflesHospital Chongqing’s EBITDA loss of $2.3mn, EBITDA margin would have risen to 21.5% instead of decreasing 1pp to 18.4%. However, 1H EBITDA loss from RafflesHospital Chongqing totalled $4.1mn, at the lower end of management’s EBITDA loss guidance of S$8-10mn in the first year.

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.

The Positives

• Healthcare services (e.g. GP clinics) underpinned revenue growth. Revenue growth of 8.9% YoY for Healthcare services was boosted by the higher patient load from the Primary Healthcare Network (PCN) scheme and new contracts. Local patients drove volume while foreign patient load growth remained flat.
• Hospital services gaining momentum with expanded facilities. Hospital services revenue grew 3.2% YoY due to higher utilisation of inpatient capacities. Hospital services revenue turned around after contracting marginally by 0.8% YoY in FY18 due to refurbishments of current inpatient facilities at the older Raffles Hospital in Singapore.

The Negative

• Margins to remain under pressure. Excluding RafflesHospital Chongqing’s EBITDA loss of $1.8mn, EBITDA margin would have risen 0.4pp to 19.8 instead of decreasing 1pp to 18.4%. However, gestation costs were well within the guidance of EBITDA loss of S$8-10mn in the first year.
• Staff costs rose 4.2% YoY due to hospital expansion. However, costs remained well contained, making up 51.5% of revenue as compared to 52.7% in 1Q18. We expect it to be above 50% of the Group’s revenue in the coming quarters until patient volume picks up.

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 has been open since January 2019. It is a 700-bed hospital located in the New North District of the Liangjiang New Area.

RafflesHospital Shanghai is expected to open in 4Q19. 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 demand for international standard healthcare by the Chinese middle class will bring Raffles Medical into a new and exciting phase of growth. The track record, reputation and preparation by the company makes this a compelling opportunity.

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

• FY18 revenue was in line with our estimates while PATMI exceeded our estimates by 6% due to a delay in recognition of gestation costs.
• Revenue grew 2.4% YoY, boosted by healthcare services revenue.
• Costs well contained with lower staff costs. Staff costs 50.3% of revenue (FY17:51.8%).
• Proposed final dividend of 2 cents per share, bringing full dividend to 2.5 cents per share (FY17: 2.25 cents per share).
• China Chongqing hospital soft launched in January 2019 and Shanghai Hospital expected to commission in 4Q19.
• We trim our FY19-20e EBITDA estimates by c.3-5% to account for gestation costs in the two hospitals in China. Downgrade to Neutral with lower TP of S$1.09 (previous TP S$1.16).

The Positives

• Healthcare Services (e.g. GP clinics) underpinned revenue growth. The addition of new corporate clients and a new Air Borders Screening contract with MOH (Ministry of Health) have lent support in the 6.0% YoY uplift in healthcare services revenue in FY18. Hospital services revenue contracted marginally in FY18 due to refurbishments of current inpatient facilities at the older Raffles Hospital in Singapore. We expect investment-holding revenue to pick up in 2019 when the remaining 80% of vacant spaces are leased out.
• Well executed cost management. Staff costs managed to contract6% YoY despite the expansion in facilities. The Chongqing hospital current accounts for 200 out of 2,500 of the total number of staff in Raffles Medical. FY18 staff costs was 50.3% of revenue as compared to 51.8% last year and we expect it to remain above 50% of the Group’s revenue in the coming quarters until patient volume picks up in RafflesHospital Extension, MCH and the two new hospitals in China.

The Negative

• Continued pressure from medical tourism. The growth of foreign patients have stagnated as the stronger Singapore dollar and rising cost of living in Singapore made regional rivals more attractive. The recent medical fee guidelines should provide more clarity to foreign patients regarding the costs of private healthcare in Singapore.

Outlook

China – Chongqing and Shanghai hospitals

Management maintains the guidance of EBITDA loss of S$8-10mn and S$4-5mn in the first and second year respectively before the hospitals breaks even in the third year of operation. The Chongqing hospital has conducted its soft launch in January 2019 and the Shanghai hospital to open in 4Q19. We initially modelled in gestation costs into our FY18 EBITDA. However, due to the delayed recognition of gestation costs for the two hospitals in China, we lower our EBITDA estimates for FY19-20e by c.3%.

Singapore

In collaboration with MOH, RafflesHospital opened a new inpatient ward catering to the needs of patients under the Emergency Care. Management expects the Singapore budget to have a positive impact as some of the additionally subsidised Merdeka generation filters into Raffles Medical due to CHAS etc.

Downgrade to Neutral with lower TP of S$1.09 (previous TP S$1.16)

We trim our FY19-20e EBITDA estimates by c.3-5% to account for gestation costs in the two hospitals in China. The demand for international standard healthcare by the Chinese middle class will bring Raffles Medical into a new and exciting phase of growth. The track record, reputation and preparation by the company makes this a compelling opportunity.

Potential re-rating catalysts: (i) Stronger demand from the MOH partnership; (ii) Better than expected performance in China hospitals.