• 9M17 Revenue and PATMI met 72%/73% of our full year FY2017 expectations
• Expansion projects on-track to commence: RafflesHospital Extension (4Q17), RafflesHospital Chongqing (4Q18) and RafflesHospital Shanghai (4Q19)
• Both MCH and Shaw Centre have broken even in 3Q17
• We upgraded to Accumulate with higher TP of S$1.32 (previously S$1.27)

The Positives

• Local patients continued to underpin growth. Higher local patient load drove Hospital division growth. Its General Practitioner Clinics also registered growth but this was offset by the lower renewal of international healthcare plans for expatriates, particularly from the financial sector.
• MCH and Shaw Centre to generate Operating Profit in FY18. Both MCH (MC Holdings) and RafflesMedical Centre Orchard (Shaw Centre) have broken even in 3Q17. MCH is still undergoing integration process; while Shaw Centre has started contributing to Operating Profit in 3Q17.

The Negatives

• Staff costs remained a drag. 3Q17 staff costs was higher by 1.6% YoY due to annual salary adjustment. We expect staff costs to stay above 50% of Group’s revenue in coming years until patient volume picks up in RafflesHospital Extension, MCH and the two new hospitals in China.

Outlook

• More revenue streams from additional capacity. Its three expansion projects are on-track to commence operations: RafflesHospital Extension (4Q17); RafflesHospital Chongqing (4Q18) and RafflesHospital Shanghai (4Q19).
• Estimated start-losses to hit 10-13% of EBITDA p.a. in FY2019-20. The Group generates c.S$100mn of EBITDA a year. We have also earmarked three years before each hospital will break even. Nonetheless, we are upbeat on the potential growth that these new hospitals in China would bring to the Group: (i) Diversification with a higher contribution for overseas operation; and (ii) Tapping into China’s growth.
• Remaining CapEx (capital expenditure) of S$362mn, to be spread across 4Q17 to FY2019. We expect the Group to partially fund the two China hospitals with debt. Management guided to cap gearing ratio at 50%, which implies much headroom for loans as the 3Q17 gearing ratio was at 10.5%.

Upgraded to ‘Accumulate’ with a higher TP of S$1.32 (previously $1.27)

We adjusted for the (i) the turnaround in MCH and Shaw Centre; and (ii) the estimated start-up costs in FY2018-21. Better than expected performance in China hospitals would be a re-rating catalyst.

Figure 2: Peers Comparison

Raffles Medical Group is currently trading at 30.6x forward PER, which is a 16% discount to its regional peers’ average of 36.5x.

Its FY17e dividend yield of 1.7% is on par with its regional peers’ average.