The Positives

• Healthcare services (e.g. GP clinics) underpinned revenue growth. Revenue growth of 8.9% YoY for Healthcare services was boosted by the higher patient load from the Primary Healthcare Network (PCN) scheme and new contracts. Local patients drove volume while foreign patient load growth remained flat.
• Hospital services gaining momentum with expanded facilities. Hospital services revenue grew 3.2% YoY due to higher utilisation of inpatient capacities. Hospital services revenue turned around after contracting marginally by 0.8% YoY in FY18 due to refurbishments of current inpatient facilities at the older Raffles Hospital in Singapore.

The Negative

• Margins to remain under pressure. Excluding RafflesHospital Chongqing’s EBITDA loss of $1.8mn, EBITDA margin would have risen 0.4pp to 19.8 instead of decreasing 1pp to 18.4%. However, gestation costs were well within the guidance of EBITDA loss of S$8-10mn in the first year.
• Staff costs rose 4.2% YoY due to hospital expansion. However, costs remained well contained, making up 51.5% of revenue as compared to 52.7% in 1Q18. We expect it to be above 50% of the Group’s revenue in the coming quarters until patient volume picks up.

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 has been open since January 2019. It is a 700-bed hospital located in the New North District of the Liangjiang New Area.

RafflesHospital Shanghai is expected to open in 4Q19. 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 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; (iii) higher investment-holding revenue growth with the remaining 80% of vacant spaces leased out.