Raffles Medical Group Limited - Will it be able to achieve higher margins in China?

Raffles Medical has various plans in pipeline including expansion in China, which may help to grow its topline, but margins may be hit.

5/8/2015 - Raffles Medical says Raffles Hospital extension will provide growth over the next 10 years after it is completed in the first half of 2017.

Raffles Holland V will be completed in the first quarter of 2016.

About 9,000 square feet of it will be used to expand the Group’s medical and specialist services, to cater to both local and expatriate patients.

The remaining commercial space will be leased to DBS Bank and other tenants offering specialty lifestyle, food and beverage and retail services.

RafflesMedical and RafflesDental will continue to benefit from the government-initiated Community Health Assist Scheme (CHAS), Pioneer Generation (PG) package and the Flexi-Medisave scheme.

Maybank Research has maintained its BUY call with a target price of S$5.40.

It says a future catalyst will be further progress in China and in Singapore.

OCBC also maintained its HOLD rating with a target price of S$4.59, as it kept its forecast unchanged.

The company just announced earnings for Q2 FY15:

Revenue: +7.2% to S$99.3 mln
Profit: +2.2% to S$16 mln
Cash flow from operations: S$23.4 mln vs S$38.6 mln
Dividend: 1.5 cents per share vs 1.5 cents per share

The growth in revenue was attributed to positive contributions from all segments of the Group.

Revenue from Healthcare Services grew by 5.7% and Hospital Services increased by 6.6%.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Will it be able to achieve higher margins in China?

Raffles Medical has formed a 70:30 joint venture with Shanghai LuJiaZui Group to develop a 400-bed hospital in Shanghai's Pudong New Area.

The hospital will provide a full suite of services to local and international patients.

The project cost is about RMB800 mln or S$170 mln, of which one-third will be equity funded.

However, it makes us wonder whether the expansion in China may reduce margins.

The Group's average net margin for the past five years was 17.7% and 16% for H1 FY15.

Its ROE has been declining steadily since FY10, from 15.8% to 12.6% in FY14.

Question

2. What could deter its expansion plans in China?

According to McKinsey & Co, China's healthcare market is expected to be worth US$1 trln by 2020.

Spending already has more than doubled from US$156 bln in 2006 to US$357 bln in 2011.

According to Maybank Research, Raffles Medical can be considered an early entrant into China’s private hospital market, as most foreign investors currently only operate clinics and medical centres.

It understands that its Shanghai New Bund International Hospital will be the first hospital in Shanghai to be developed and operated by a foreign-local joint venture.

Most incumbents either rent sites to operate hospitals, or only manage them.

Raffles Medical will be the first foreign operator to be involved from start to finish.

The venture will also own the hospital land, which should mitigate risks of losing a site or inflated rentals, says Maybank.

(Read the full story to get all 5 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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