- Keep BUY and SGD1.65 TP, 18% upside and c.2% yield. While we remain cognisant of rising costs and believe the current profit margin may not be sustainable, we expect Raffles Medical’s China business to drive long-term earnings growth. In the near term, while COVID-19 related revenue could decline, a normalised healthcare business, higher foreign patient load in Singapore and YoY higher revenue from China should enable it to book sequential revenue growth. Its valuation also remains compelling (trading below peer average of 2FY P/E of 32.4x).
- With near term growth resumption, RFMD is looking to expand its presence in China. In its latest results briefing, management indicated that the number of patient visits at its China operations has been steadily rising, with numbers for its hospital in Chongqing doubling in the past year. A similar view was shared by Dr Vincent Chia, managing director of Raffles China Healthcare, a subsidiary of RFMD in the following news article. Referring to its China operations he said: “Things are starting to look slightly more relaxed, but in a very coordinated fashion”. Dr Chia also mentioned that the company plans to increase the number of cities it serves to 20 in the next 3-5 years. In China, it currently provides healthcare service in eight cities, including Hong Kong. The company has already received approval to open a centre for assisted reproductive therapy and in vitro fertilisation in Hainan, China. In this facility, it intends to invest SGD10m, and it expects to begin providing services in 1Q23.
- China operations on track with guided initial losses. We maintain that its Shanghai hospital, whose operations began in late 4Q21 but were interrupted in 1H22 due to lockdowns related to COVID-19, should see a gradual resumption in patient inflows during 2H22F. For the hospitals in Chongqing and Shanghai, RFMD has maintained its 2022 EBITDA loss guidance of SGD3-4m and c.SGD10m.
- Looking to shore up funding to assist acquisitions. In addition to a SGD135m net cash position, RMFD has announced the establishment of a SGD1bn multi-currency medium-term notes programme, which will enable it to raise additional funding. We believe this could enable the company to explore acquisition opportunities in markets in which it operates. As per news reports, ByteDance has recently acquired one of China’s largest private hospital chains for about USD1.5bn. We believe growth opportunities could exist in China, which is working towards its “Healthy China 2030" blueprint that was announced in 2016.
- ESG premium. Our TP, which includes a 2.2% ESG premium, implies 33x 2023F P/E – in line with its regional peer average.
Source: RHB Research - 31 Aug 2022
