Upgrade to BUY. In recent months, the company has seen expansion plans scuppered, with the unsuccessful tender of a greenfield Hong Kong hospital and failed application to use its Thongsia Building as a medical centre. In the current market environment however, we think there is much to love about a company which has been resilient in delivering earnings growth. Organic hospital expansion and a possible China project will add a dose of excitement.

Raffles Hospital Expansion to drive organic growth. No harm done from these setbacks, as we expect the Group to reap a non-operational gain from the sale of Thong Sia Building. Raffles Hospital expansion is still expected to start by this year. With current bed utilization at around 60%, we believe there is further room to grow hospital revenue at current trajectory (up around 15% yoy in past twelve months.

Still in active discussions for Shekou, Shenzhen hospital. Given the timelines involved upon signing the letter of intent in Feb 2013, we believe a more concrete development could materialize over the next 2 months. We examine the China healthcare industry in more depth and conclude that potential returns from this 200 bed international hospital is comparable to existing matrixes, while the long-term potential is significant for Raffles Medical. Our primary estimate is for this hospital alone to add around SGD18.5m a year in profit (or 30% of current bottomline and SGD3.4 cents EPS) once it turns operational.

More aggressive expansion on the cards. In targeting China, management sees the potential beyond a single hospital, and will likely kick on from there. The company also appears to be adopting a more aggressive stance, after years of conservative organic growth. Based on our estimates, the company can easily fund both the Raffles Hospital expansion and the potential new Shekou project without going into debt.

Much to love about this company. Profitability has grown for 16 years in a row and this resiliency is much prized in the current environment. We upgrade the stock to a BUY, with a new TP of SGD3.80, factoring in higher cash flows (still based on a three-stage DCF methodology). This implies 28.8x FY13F, which is comparable to Asian-listed peers.

Source: Maybank Kim Eng Research - 25 Jun 2013