Raffles Medical Group - Market pricing in Singapore growth but China still under appreciated


Mayo branding and heavy capex drives 2015-25E group PATMI CAGR of 22%
Raffles Medical Group (RMG) PATMI is slated to double by 2021E and increase by 7x by 2025E – propelled by network expansion, 3.5x increase in bill size per patient, and 5x growth of its operational beds. In the near term, recent Mayo Clinic tie-up and expansion in Singapore would drive 2015-17E PATMI CAGR of 16.5%. Compared to consensus, our Shanghai hospital forecast is aggressive but fair, and we incorporate Shenzhen hospital into our target price. FY16E EV/EBITDA at 17.3x is cheap versus c.19.5x peer average. China ventures are underappreciated at current prices - investors should position before Shenzhen hospital details are announced and eventual recognition of Mayo branding.


2015-25E Singapore PATMI CAGR of 15% is driven by increasing market share
Three key reasons why RMG’s private specialist market share in Singapore could increase to 17% from 12%:

(1) Raffles Hospital extension from 4Q17 would enable RMG to incrementally utilise its 380 licensed bed limit from current c.200 beds;

(2) its average specialist bill is cheaper than its peers – some procedures are up to 23% lower; and

(3) its Mayo Clinic tie-up, the first outside America, should spur best practices leading to a reputational increase.

China hospitals to break even in 2021E & grow to c.45% of earnings by 2025E
The severe lack of premium hospitals, a growing upper income class and strong domestic partners are compelling reasons to believe that Shanghai hospital, which opens in c.2019E, would succeed. We think that Shenzhen hospital will open in 2022E, amid slightly tougher conditions compared to Shanghai. Management emphasised that its China operations would follow Singapore standards, which should reduce reputational and regulatory risks.

Technical Analysis
Daily Chart
Initiating with Buy; consensus view on China ventures is too conservative
We value RMG using SOTP of DCFs for its current operations (8.3% COE, beta 1.2, ERP 4.5%, RFR 2.9%, TGR 0.5%) and China hospital ventures (12.4% WACC, COE 15.7%, beta 2.1, ERP 5.6%, RFR 3.9%, COD 8%, D/E ratio 0.5x, TGR 1%) due to its staggered earnings profile.

Key risks: Shenzhen hospital venture does not materialize; delays or cost overruns of its China hospitals. (Read Report)

Source : Deutsche Bank Markets Research

Labels: ,