• Maintain BUY, with new SGD1.60 TP from SGD1.65, 28% upside and 2% yield, while reducing 2023-2024 earnings by 3% each. We met with management and came back feeling positive about Raffles Medical’s longterm growth. Despite COVID-19-related revenue declining and cost headwinds comprising near-term concerns, the revival of its healthcare and hospital business in Singapore remains strong. Its China business growth is highly dependent on the country moving away from the zeroCOVID-19 stance. While inorganic growth potential exists, its timing is difficult to estimate.

• The local healthcare business received a shot in the arm during COVID-19. The local healthcare business, which largely comprises of over 50 general practitioner (GP) clinics, witnessed a sharp growth in revenue during the COVID-19 years (2021-2022). RFMD indicated that the current patient load at its GP clinics is higher compared to that of the prepandemic period (ie 2019). It continues to realign its clinic network with a focus on demographics and demand centres, which means greater focus on suburban clinics as there were fewer corporate customers visiting the central business district GP clinics during the COVID-19 years. While the use of telemedicine was quite prevalent during the pandemic, the group believes the service will continue to complement its GP clinic network and is unlikely to replace current healthcare operations. We expect the healthcare business’ elevated PBT margin to gradually taper off beyond 2023 and return to pre-pandemic levels as COVID-19-related revenue completely disappears.

• China business remains dependent on the Government’s COVID-19 policy. Management maintained that the EBITDA breakeven period for its China operations remains unchanged at 2-3 years, but the year of achieving such a breakeven will depend on how soon China moves away from its zero-COVID policy. While RFMD’s China business has seen a steady increase in the number of patient visits, we have revised our view that its Shanghai hospital could see a gradual ramp-up in operations only in 2023 (vs earlier expectations of a ramp-up in 2H22).

• Strong cash flow generation and well-funded war chest create inorganic growth opportunities. RFMD has a SGD135m net cash position and we expect the group to generate >SGD100m of free cash flow in each of the forecast years as there is limited need for capex spending. It has also announced the establishment of a SGD1bn multicurrency medium-term notes programme with DBS. This, we believe, could enable it to explore inorganic growth opportunities in China and the ASEAN region.

Source: RHB Research - 13 Oct 2022