• 3Q18 Revenue and PATMI missed our estimates by 5% and 6% respectively.
• Higher revenue contribution from clinics of 8.0% YoY was offset by a fall of 3.8% from hospital services.
• Cost was well contained with lower staff costs. Despite softer revenue growth, margins expanded.
• China Chongqing hospital slated open before the end of 2018.
• Maintain Accumulate with lower TP of S$1.16 (previous TP S$1.32). We trim our FY18-19e revenue estimates by 3-9% to account for slower Singapore revenue growth.

The Positive

+ Healthcare Services continued its strong performance. The 8.0% YoY increase in revenue from Healthcare Services division was due to insurance income, the addition of new corporate clients and a new Air Borders Screening contract with MOH (Ministry of Health) have lent support in the uplift.

+Cost management fairly executed. Staff cost managed to contract5% YoY and 3.5% QoQ despite the expansion in facilities. 3Q18 staff costs make up 51.5% of revenue, 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 public hospitals and medical tourism. The 3.8% YoY decline in Hospital revenues was due to the refurbishment of the current inpatient facilities, decelerating foreign patient load and public hospitals. Public hospitals account for 80% of the total beds, and they have the critical mass of subsidised patients to offer a more competitive price, if necessary. The growth of foreign patients continues to decelerate as the stronger Singapore dollar relative to regional countries make options in Bangkok, Kuala Lumpur and Penang more attractive. The more price sensitive customer base will look for a cheaper alternative as Singapore’s cost of living in becomes more expensive. We trim our FY18-19e revenue estimates by 3-9% to account for slower Singapore revenue growth.

Outlook

 China

Expect some front-loading of staff cost as Chongqing hospital opens in 4Q18. There will be the typical start-up costs (staff and depreciation) before beds start to fill up. Management is expecting EBITDA loss of S$8-10mn and S$4-5mn in the first and second year respectively as the Chongqing hospital breaks even in the third year of operation. In its initial phase, approximately 100 staff (doctors, nurses and administrators) will be employed to cater to the major disciplines. The Shanghai hospital is expected to open in 2H19.

 Health Insurance

The recent strategic partnerships in the health insurance industry provide an opportunity to increase patient volume by offering policyholders access to a panel of specialists at Raffles Hospital. Estimated potential IP revenue is S$10m-12m, targeting 25,000 new policyholders in its first year. We are optimistic about Raffles Medical’s move into the health insurance scene in Singapore as well as in China when the Chongqing and Shanghai hospitals open in 4Q18 and 2H19 respectively.

Singapore

In collaboration with MOH, RafflesHospital opened a new inpatient ward this quarter catering to the needs of patients under the Emergency Care. Renovation works are expected in the next quarter to add more inpatient facilities to support the Group’s growth strategies in 2019.

Maintain Accumulate with lower TP of S$1.16 (previous TP S$1.32)

The insatiable 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; and (ii) Better than expected performance in China hospitals.