Raffles Medical - Investors overlooking Mayo prospects ; near-term growth misunderstood

2015-17E PATMI CAGR of 17% is mainly driven by bill size increases
Our interaction with investors post our initiation report, Market pricing in Singapore growth but China still under appreciated dated 3 Dec 2015, seem to indicate that they are aware of Raffles Medical GroupoU (RMG) network & capacity expansion plans over the next 3 years. However, most were clueless about RMG joining the Mayo Clinic Care Network.

In our view, Mayo is important as it would:
(1) spur a reputational increase for RMG as potential patients could regard RMG-Mayo affiliation in similar terms to that of top private practice specialists;

(2) make greater sense for a patient to choose RMG as its bill size is c.2% lower than the median (we believe that top private practice specialists would command a significantly higher bill size compared to the median though);

(3) deepen RMG's doctor expertise with their access to the Mayo knowledge pool.

Our 16.5% EBITDA CAGR over the next two years is predominately driven by RMG Mayo tie-up, resulting in bill size increases. Thereafter, network & capacity expansion should enable volume growth, which leads to an increase in market share. While a reputational boost is hard to quantify, we believe premium patients are better informed of their choices, leading to quicker recognition of the RMG-Mayo affiliation.

Mayo Clinic has highest number of No. 1 ranked medical specialties in the US
The Mayo Clinic Care Network tie-up will enable RMG to consult on Mayo's library of patient education materials and view presentations by Mayo physicians & scientists. RMG doctors will also be able to collaborate directly with Mayo Clinic physicians to treat patients with complex medical conditions. This collaboration would extend to all subsidiaries of RMG. To recap, Mayo Clinic is a non-profit medical care and research provider with the highest number of No 1 ranked specialties (Endocrinology, Gastroenterology, Geriatrics, Gynecology, Nephrology, Neurology, Pulmonology, Urology). Mayo's Cardiology, ENT, Orthopedics are ranked No.2 and Cancer No.3, according to U.S. News & World report. RMG is the only non-North American member in Mayo's network.

Technical Analysis
Daily Chart
Longer-term positioning should negate concerns about liquidity and valuations
We note RMG's thin liquidity of USD1.9m/day and higher-than-average EV/EBITDA valuation compared to the market (18x vs 12x for MSCI Singapore, FY16). We think a higher valuation for the healthcare sector is justified by stronger growth prospects (2015-17E EBITDA CAGR of 16.5% vs 5.4% for MSCI Singapore) and a scarcity premium for sizable healthcare stocks. Our DCF valuation indicates that the market is not factoring significant contribution from RMG's China hospital venture at the current share price. However our 2019-25E PATMI CAGR of 30%, which is driven mainly from RMG China Hospital ventures, seems comfortable with investors given that Chinese hospital stocks have a track record of c.30-50% PATMI growth. (Read Report)

Source : Deutsche Bank Markets Research

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