• 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.