• 1Q FY17 Revenue/PATMI met our 20%/19% of our full year forecasts
• New and complementary paediatric clinic to commence in 1 Jul-17
• Downgraded to “Accumulate” with unchanged TP of S$0.79 (S$1.57 pre-share spilt) due to recent stock run-up. Our forecasts remain unchanged.

Core segment Obstetrics and Gynaecology (“O&G”) continued to gain market share

• Delivered 404 babies in 1Q 2017, +9.8% yoy, despite -0.5% yoy dip in total number of live births in Singapore (includes both live births in Public and Private) in 1Q17. SOG’s market share improved 0.3pp yoy to 4.1%.
• The first quarter is seasonally the Group’s slowest quarter of the year. Management is cautiously optimistic of a recovery in birth numbers later in the year, in tandem with the abating negative sentiment arising from Zika Virus outbreak.

We remain upbeat of the Group’s ability to deliver organic growth despite the current sluggish birth rate, in view of (i) SOG’s growing market position, and (ii) support from the new Obstetrician, Dr. Hong Sze Ching (joined in July 2016).

Higher operating expenses and the new Paediatric pillar could erode FY17F EBIT margin

1Q FY17 EBIT margin was lower despite favourable business mix with higher margin segments, due to:

• Rental expenses coupled with recruitment of two new specialist medical practitioners and clinical staff for SOG-SK Lim Breast and General Surgicare Clinic (in May-16), and SOG-SC Hong Clinic for Women (in Jul-16)
• Higher depreciation expense due to the purchase of four new ultrasound machines over the year

We expect the Cancer-related business to achieve higher profitability this year, with higher patient load as well as with Dr. Lim Siew Kuan turning profitable in FY17. However, it could be partially offset by the latent period of the new Paediatric services. We will continue to monitor the performance of Cancer-related segment and the performance of new Paediatric business before we review our assumptions.

Capturing the whole eco-system with Paediatric services in Jul-17

Maiden general paediatrics and adolescent medicine services is targeted to commence operation in 1 July 2017. We expect the Group to start with one consultant and a clinic located in Parkway East Hospital, close to its O&G specialists. This is in line with SOG’s Whole-of-Life concept – the new pillar will drive greater growth to its business while opening up its market to young patients from both genders. We believe that the Group could tap onto the established base of ~7,000 babies which SOG delivered over the past five years. Notwithstanding that, the existing six O&G specialists could provide a sustainable potential patient pool to the new pillar.

Downgraded to “Accumulate” rating with unchanged TP of S$0.79 (S$1.57 pre-share spilt) due to recent stock run-up

The Group completed two-for-one share split in 9 May 2017. The intention for stock spilt is to reduce price for each share and increase market liquidity of the shares, thus broaden the base of shareholders.

Potential re-rating catalysts:

1. Successful new recruits of medical practitioners to expand its current three growth pillars.
2. New product development or successful marketing of existing products to drive greater profitability for Dermatology business. Currently, the Group has identified four ranges of skincare products which are suitable to use during pregnancy from Joyce Lim’s existing products. These products which are targeted to treat common skin problems during pregnancy are now being marketed through its O&G clinics.
3. Better-than-expected margin improvement, particularly its Cancer-related segment.
4. Faster-than-expected time to reach profitability for its new growth pillar.
5. Expansion into complementary medical services, such as In-Vitro Fertilisation (“IVF”) to complement its O&G segment.