• Reiterate BUY and SGD1.50 TP, 34% upside with c.2% yield. We recognise that investors are concerned about Raffles Medical’s (RFMD) flattish 2022 profit growth amidst lower contribution from COVID-19 related revenue in Singapore, rising inflation, and slower than earlier guided growth in its China business. However, we remain optimistic on RFMD’s Singapore operations gradually reverting to normal, which will help offset some decline in COVID-19 related revenue and eventually drive growth in 2023 and beyond. China, which accounts for c.7% of RFMD’s revenue, should also see higher revenue beyond 2023. At current share price, RFMD’s valuation looks compelling.

• Normalisation of Singapore operations. We expect RFMD’s Singapore hospital business to witness higher occupancy and billings, driven by the return of domestic patients undergoing elective treatments that were deferred during the COVID-19 pandemic as well as from the return of some foreign patients to Singapore. This, in addition to normalised business operations for Singapore healthcare clinics, would help RFMD offset the drop in COVID-19 related revenues in the near term and support growth in 2023 and beyond.

• China’s zero COVID-19 policy has hurt private healthcare players. As per news report, the diversion of resources into China’s zero-COVID-19 approach has forced multiple private hospitals to suspend services they relied upon for revenue. We believe China’s zero COVID-19 policy impacted RFMD’s China operations as well. RFMD’s Chongqing hospital was expected to see an EBITDA breakeven by end 2022, which we believe could now be delayed by a year. RFMD was supposed to see meaningful revenue contribution from its Shanghai hospital in 2022. However, we now believe this higher revenue contribution will now be delayed into 2023. We currently maintain that the Shanghai hospital will achieve an EBITDA breakeven by end-2024, as per the original estimate. We believe RFMD’s China hospitals have a strong long-term growth outlook as private hospitals accounted for only c.15% of total patient visits in 2020. This percentage, we believe, has the potential to grow further in coming years. For RFMD, China operations accounted for c.7% of its revenue in 2021.

• Strong balance position and compelling relative valuation. While RFMD’s focus will be on ramping up China operations, once the country gradually relaxes its stringent COVID-19 related restrictions, the company’s SGD91m net cash positon should enable it to look at inorganic growth opportunities within the region. Our TP, which includes a 2% ESG premium is based on a fair value of SGD1.48. RFMD’s 2023F P/E and EV/EBITDA are below its peers’ average (Figure 1).

Source: RHB Research - 25 Jul 2022