• 1Q17 results largely stable
• Slower foreign patients’ volume
• Expansion plans in progress

1Q17 Results Largely Stable

Raffles Medical Group’s 1Q17 results were generally stable, with 1Q typically being the weakest quarter. Revenue was slightly down 1.7% YoY to S$114.9m, due to softer demand from foreign patients. Both the Healthcare and Hospital Services divisions saw their segment revenues decreased by 2% and 1.9%, respectively. The group maintained its costs while it highlighted a lower wage credit received of S$0.7m vs. S$1.9m in 1Q16. Excluding this wage credit, operating profit would have grown 3.8%. PATMI was largely stable at S$15.5m.

Waning Medical Tourism May Not Be a Secular Trend

Foreign patients’ volume saw a slight overall decline, while local patients’ volume recorded a small single-digit increase. Nonetheless, management believes the waning medical tourism may not be a secular trend and cited the macro environment in the region as well as the stronger SGD against currencies like IDR as factors. Outside of Singapore, its MCH subsidiary also saw a slower quarter due to a slowdown in China, while there are plans to expand operations.

Chongqing Hospital to Open by 2018

Looking ahead, the group will open its Raffles Hospital extension building in the latter part of 2017, keeping to its plan of having about half the space for their own use. 2H18 onwards will likely see the opening of the group’s greenfield hospital project in Chongqing, followed by Shanghai in 2019. We understand that the Chongqing hospital will start operations with 200 beds and 100 public beds. We are positive on the potentially significant addressable patient population for its hospitals in China while execution risks should be alleviated with a strong management team at the helm, in our view.

Time Will Tell

We are cognizant of the risk of costs overrun in relation to expansion plans but we believe management holds a disciplined approach to cost control. Given preliminary assumptions for Chongqing and Shanghai projects, our fair value estimate remains at S$1.60 (SOTP, with 32x FY17F P/E for core operations, and S$0.27 attributed to China projects). At current share price levels, we maintain BUY.

Source: OCBC Research - 25 Apr 2017