• 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.