• Maintain BUY and SGD1.65 TP, 10% upside with 2% FY23F yield. In anticipation of strong 2H22 earnings and a likely positive outlook for its China segment, Raffles Medical's share price has risen by 7% YTD. We expect greater clarity on the sustainability of its margins and updates on the outlook for its China businesses when it announces FY22 results on 27 Feb. While cost pressures may weigh on the group’s near-term earnings outlook, we remain positive on its long-term growth – which we believe remains dependent on the ramp-up of its China operations.

• Near-term cost headwinds could persist despite recent strong margins. RFMD reported better-than-expected margins for 9M22, as the drop in costs from COVID-19-related business was faster and higher than the decline in revenue. However, we maintain that labour constraints and higher costs (wages and energy) may negatively impact its current elevated margin. Other healthcare players in Singapore are reporting a similar trend on the cost front as well. RFMD is trying to pass on some costs to patients, but we believe it may not be sufficient. This, along with EBITDA losses from its China operations, is why we expect it to report lower YoY earnings in 2023, despite registering revenue growth.

• China’s reopening could boost medical tourism in Singapore... Historically, foreign patients used to account for close to one-third of Raffles Medical’s overall patient load in Singapore. The group recently stated that since the Singapore borders reopened on Apr 2022, it has seen a return of foreign patients – especially from Indonesia and Indochina. Medical tourism in Singapore will gain further momentum with China reopening its borders. We believe this should translate to higher foreign patient loads at its Singapore hospital operations.

• ...and could also speed up the growth of its China operations. We currently expect the group’s China business – especially its Shanghai hospital – to ramp up gradually this year. Management has maintained that the EBITDA breakeven period for its China operations remains at 2-3 years, implying that the Shanghai hospital could record negative EBITDA in 2023-2025. However, a faster-than-expected recovery in demand for healthcare in China, amidst the country’s reopening, could potentially bring forward this breakeven period.

• We see further upside to its share price. Our TP for RFMD, which continues to be based on the average value derived from using the P/E, P/BV, EV/EBITDA, and DCF valuations, offers a 10% upside. As RFMD has an ESG score of 3.11 out of 4 (ie slightly above the country median), our TP includes a 2% ESG premium over its intrinsic value, in line with our in-house proprietary methodology.

Source: RHB Research - 3 Feb 2023