2Q13 results within expectations. Over the last few quarters, there were some market concerns over the loss of revenue from the prison contracts and the increase in wage cost. This set of results where net profit was up 16% yoy, shows the enduring consistency of the company. Our investment thesis remain that resilient earnings growth in its core operations, coupled with regional expansion plans will result in upside for the stock from here. Maintain BUY.

Broad-based growth. During the quarter, revenue grew 13% yoy, with hospital and healthcare services segments up 17% and 6.5% respectively. Net profit grew by 16% yoy, which was similar on a halfyearly basis. We see this as evidence that operating leverage remains in place going forward. This was only temporarily lost last year when the company pre-emptively increased salaries of nurses and auxiliary staff.

Substantial flexibility to increase prices. Management shared that about 2/3 of the revenue growth in the hospital segment was driven by patient volume while 1/3 was driven by price increases. This implies only around 5-6% increase in prices, slightly higher than core inflation. We see this more as reluctance on management’s part to increase prices too quickly, rather than a lack of pricing power. In our view, there is significant headroom to increase prices, given the 20-30% discount gap from peer hospitals, Gleneagles and Mount Elizabeth.

Expansion plan updates. Construction on Raffles Hospital extension should start this year, and approval has already been given to expand space by 1,200 sq feet, with other technical considerations under discussion. There has been progress in discussions for its Shenzhen, PRC, hospital plans, and management has set an internal timeline of 12 months for concrete agreements to materialize. (LOI in Feb 2013).

Maintain BUY. 1H13 makes up 45% of our full-year estimates, and is on-track given slightly stronger seasonality in the 2nd half. We therefore keep our estimates unchanged. Our TP of SGD3.80, (based on a DCF methodology) implies 29.2x FY14F, which is comparable to Asian-listed peers.

Source: Maybank Kim Eng Research - 23 Jul 2013