• 1H17 revenue and PATMI were below our expectations. Revenue from both hospitals and clinics grew at a slower than expected pace. Losses from MCH, though narrowing, were higher than expected.
• RafflesHospital Extension to commence operation in 4Q17. 25% additional bed capacity and rent to underpin FY18e top-line growth.
• Staff costs continue to drag profitability while RMG gears up for expansion.
• Adjusted FY17e Revenue/PATMI lower by 8%/6%; Downgrade to Neutral with lower TP of S$1.27

The positives

+ Marginal growth in revenue after a weak quarter in 1Q17: Management noted that the uptick was underpinned by a 3% QoQ patient load growth (mainly from local patients), and a 1% QoQ of pricing adjustment to inflation.

+ More significant contribution from Raffles Holland V: It is now at full occupancy and management is expecting a gross rental yield of 5.8%.

The negatives

– Persistent staff cost pressure as the Group ramps up its operations in Singapore and abroad. We expect staff costs to remain above 50% of Group’s revenue in coming years, eroding profitability until patient volume picks up in RafflesHospital Extension, MCH (“MC Holdings”) and the two new hospitals in China.

– Higher costs erode competitive advantage, mainly due to Stronger Singapore dollar compared to its regional peers. Management noted foreign patients shift from inpatient to outpatient, i.e. foreign patients may seek cheaper inpatient healthcare services at home or in Malaysia and Thailand, after consultation in Singapore.

Outlook

• RafflesHospital Extension opening with 50 beds and specialist outpatient clinics in 4Q17: This would add 25% bed capacity and enlarged clinic area to the existing RafflesHospital which is facing a space shortage. Current occupancy rate range from 60% to 80%. The Group intends to add another 50 beds by early-FY19, and will eventually increase the total operational bed count to 200, i.e. doubling the current bed capacity in RafflesHospital.

While half of the space would be catered to for capacity expansion, the remaining unutilized space would be leased to Food & Beverage and healthcare-related tenants.

• Higher contribution for overseas operation from FY18-19e: RafflesHospital Chongqing (700-bed capacity) and RafflesHospital Shanghai (400-bed capacity) are expected to start operations with 200 private beds each in 2H18 and 2H19, respectively.

While we earmarked three years before each hospital to break even, we are upbeat on the potential growth that these new hospitals in China would bring to the Group. Notwithstanding that these hospitals are at least the size of RafflesHospital plus RafflesHospital Extension, the potential client base is also larger. Singapore’s population was at 5.6mn as compared to Chongqing’s 36.7mn and Shanghai’s 24.15mn. Having said the above, a slowdown in China could lead to a longer time to break even for the new hospitals and clinics.

Downgraded to ‘Neutral’ with a lower TP of S$1.27 (previously $1.49)

We adjusted FY17e Revenue/PATMI lower by 8%/6% on (i) slower patient volume growth due to macro headwinds; and (ii) higher operating costs. Re-rating catalysts: (i) Better than expected performance in China hospitals; and (ii) Successful restructuring and integration of MCH.

Figure 1: Peers Comparison

Raffles Medical Group is currently trading at 33.8x forward PER, which is comparable its regional peers’ average of 34.9x.

It’s FY17e dividend yield of 1.6% is also on par with its regional peers’ average.