• BUY, new SGD1.75 TP from SGD1.70, 20% upside with 2.5% FY23F yield. While China’s reopening, 1-child policy relaxation and ageing population, along with inorganic growth opportunities, could drive Raffles Medical’s longer-term revenue growth, we see near-term tailwinds to its hospital business on the return of foreign patients and further collaboration with the Government. The extension of the current transitional care facility (TCF) arrangement is a near-term catalyst. Our valuation is now based on 1-year forward estimates vs earlier 2023 estimates.

• Medical tourism has more upside. Before COVID-19, 40,000 foreigners visited Singapore each month for medical care. Pre-pandemic, 25-30% of the patient load at RFMD’s hospital used to be foreigners. This number is currently at 25% with patients from Indonesia, China and Indochina. The return of foreign patients may boost revenue intensity of RFMD’s hospital operations, amid higher billings from elective surgeries and treatments. As per a news report, for IHH Singapore, foreigners now comprise 20% of its hospital patients (30% of revenue). As China medical tourists should return in 2H23, RFMD’s hospital’s revenue growth should be sustained.

• Infrastructure shortage and aging population = higher hospital bed occupancy rates at public hospitals. In addition to delays in the opening of new hospital facilities, the ageing population is the leading cause of the increased strain on Singapore’s public hospitals. The percentage of senior patients aged 65 years and above has risen from 39% in 2019 to 43% in 2022. Between 2019 and 2022, patients were staying in hospitals 15% longer on average. Public hospitals are running at >80% occupancy, and some are at 100%. The Health Ministry clarified that this bed crunch is not caused by foreign patients (0.5% of patients at public hospitals).

• Collaboration with the private sector. The return of foreign patients has added to the bed crunch in the private sector. So, the Government plans to deploy more TCFs for medically stable patients in public hospitals waiting for long-term care arrangements. We reiterate that RFMD’s patient-centric business model and its previous collaborations with the Government on other healthcare measures make it best-placed to continue running its TCF past Jun 2023. It has opportunities to participate in operating new TCFs that will be offered under the tendering process.

• ESG score remains unchanged at 3.1. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May 2023 thematic research note titled Envisioning a Better Future. However, this change in weights does not change RFMD’s ESG score. Since its ESG score is one notch above the country median, we apply a 2% ESG premium to its fair value of SGD1.70 to derive our TP.

Source: RHB Research - 10 May 2023