Raffles Medical

Raffles Medical: (S$4.11) Under appreciated China operations key to growth
A foreign broker has initiated coverage on Raffles Medical (RMG) with a Buy rating and a TP of $5.44 as it sees the healthcare counter as a beneficiary of several earnings catalysts that may spread over several years.

Overall, these catalysts should drive net profit CAGR of 22% over the next 10 years with net profit doubling by 2021 and soaring 7x by 2025.

For its Singapore operations, RMG is expected to chalk net profit CAGR of 15%, driven by increasing market share via the following:
1) Raffles Hospital extension from 4Q17 to increase bed capacity to 380 from 200
2) Recent collaboration with Mayo Clinic should strengthen RMG’s reputation and accelerate its market share of specialist admissions to 17% from 12% currently
3) Cheaper specialist bills could imply some headroom for increased prices and/or capture of market share

Over in China, the broker opines that the lack of premium hospitals, a growing affluent class and strong domestic partners as key to success there. RMG is expected to see its ventures add 400 beds in Shanghai and 200 beds in Shenzhen.

While these catalysts may take some time to materialise, near term growth is likely to be crimped by:
1) Margin decline due to staff hires and training for its China operations
2) Higher interest expenses from increased borrowing related to its expansion in China
3) Increased depreciation from its new Raffles hospital extension and Holland Village expansion
4) Flat EBITDA margin from its Shanghai hospital till 2020 due to teething issues

Nevertheless, RMG should still be able to record positive growth with domestic and ASEAN affluent class supporting its foreign patient volumes. Purposeful expansion as well as leasing of spare spaces could help it tide over initial start-up costs.

The broker feels that investors should buy into the stock before the Shenzhen hospital details are released as the street has generally not factored the Shenzhen venture into their valuations. In addition, RMG’s Mayo collaboration is still new and will take some time before the market recognises the premium branding.

The counter is currently trading at 33.5x forward P/E. The street has 7 Buy and 5 Hold ratings with a consensus TP of $4.93.