• 1Q17 Revenue/PATMI met 22% of our FY17 full year forecasts. Revenue from both hospitals and clinics were softer than expected.
• We expect revenue from clinics to support FY17F top-line growth following new contribution from RafflesMedical Orchard and MCH. We expect both to breakeven by end-FY17
• Staff costs continue to drag profitability while RMG gears up for expansion
• Two new hospitals in China with aggregate bed capacity of 1,100 slated for completion by end-2018

Losing price-competitiveness on macro headwinds

Local patient load (more than two-thirds of its total patient volume) grew at single-digit rate despite some losses of price sensitive patients to public healthcare. Growth of foreign patient load declined at single-digit rate due to stronger SGD against regional currencies. Patient volume from Indonesia contracted but partially offset by higher patient load from China, Vietnam and Cambodia.

Management is still cautiously optimistic of a c.10% FY17F top-line growth supported by growing multidisciplinary medical centres and MCH

Raffles Holland V (opened in June-16) has broken even in 1Q17. Raffles Holland V, which is now near full occupancy, is expected to contribute more significantly to the Group’s profit in coming quarters. Meanwhile, RafflesMedical Orchard and MCH (“MC Holdings”) are targeted to breakeven by end-FY2017.

Persistent staff costs pressure on ongoing recruitment drive

The Group’s staff costs as a percentage of revenue was 53.1% in 1Q17 as compared to 51.0% in FY2016. Staff costs will continue to drag profitability until patient volume picks up in MCH and the two new hospitals in China, providing operating leverage.

Two new hospitals in China slated for completion by end-FY2018; Tapping on China’s growing healthcare market

RafflesHospital Shanghai (400-bed capacity) and the recently announced RafflesHospital Chongqing (700-bed capacity) are expected to start operations with 200 private beds each. Medical clinics in its vicinity, including the MCH clinics in Shanghai, Beijing, Nanjing, Tianjin, Dalian, and Shenzhen, will feed into the two new China hospitals. The Group has also shared earlier of its intention to add two to three new clinics in China. A slowdown in China could lead to a longer time to breakeven for the new hospitals and clinics.

Maintained ‘Accumulate‘. We adjusted our forecasts to include the higher operating expenses and CapEx (“Capital Expenditures”) for RafflesHospital Chongqing, which translates to a lower DCF-derived target price of S$1.49 (previously S1.60). Better-than-expected margins from its China hospitals could lead to re-rating.

Going into net debt position by end-FY2017

The additional CapEx arising from its new hospital in Chongqing will turn the Group’s net cash position of S$89.4mn in 1Q17 to a net debt position by end-FY2017. The remaining CapEx are estimated at:

• S$94 mn for RafflesHospital Extension in FY2017; and
• S$98 mn for RafflesHospital Shanghai and c.RMB1 bn (or c.S$202 mn*) for RafflesHospital Chongqing to be spread across FY2017-18.

*SGD1 = RMB4.95

The Group will take on RMB-denominated loans to fund the CapEx of its two China hospitals. These loans will be naturally hedged by the revenue from its China operations somewhat. The S$119 mn cash and cash equivalent (as at end-1Q17), and a c.S$80 mn cash flow from operating activities, should support its dividend payout and CapEx.

RafflesHospital Chongqing

• Pursuant to the Group’s Memorandum of Understanding (“MOU”) with Chongqing Liangjiang New Area Administrative Committee in 27 Feb 2017, it has acquired a piece of land with estimated land area of 28,000 square metres together with an in-construction building thereon, located in the New North District of the Liangjiang New Area in Chongqing. The construction of a 700-bed international tertiary general hospital is targeted to be completed by 2Q18.
• The project enables RMG to tap growth in the western region of China. Chongqing has a population of 33 million people. It is the third government-to-government project between Singapore and China (after 1994 Suzhou Industrial Park and the 2008 Tianjin Eco-City), and an important node along the new “Silk Road Economic Belt”.
• Opening of RafflesHospital Chongqing is strategically timed to ride on the Belt and Road Initiative. There is no clear timeframe for Silk Road initiatives, but the government has marked 2020 as an important deadline. Hence, with the new RafflesHospital Chongqing will have a year’s head start to ramp up its operation.
• Lower Operating margin for brand building and market penetration. What sets RafflesHospital Chongqing apart from RafflesHospital Shanghai is not only of its larger scale, but also the 100 public beds it will house to service yibao patients (i.e. to accept China’s national health insurance). Management shared that it will be a training platform for the Group’s specialists to pass on knowledge and technical skills to local practitioners and medical staffs. Although the 100-bed public segment is expected to operate under a different brand name to prevent dilution of brand equity as a premium healthcare provider, we perceived it as a strategic move to build trust in a community with no private hospital presence. Management shared that RafflesHospital Chongqing will be the only international hospital in Chongqing.