Raffles Medical Group - DBS Research 2022-08-02: Another Record-Breaking Year!

• Raffles Medical (SGX:BSL)’s 1H22 PATMI grew 51% y-o-y (+34% h-o-h) to S$60m, above our estimates, recording one of its best half-yearly results. Despite the tapering off of contributions from COVID-19-related services, the record-high results were led by the return of volumes of both local and foreign patients.
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• More importantly, we note that healthcare services have doubled to that of pre-COVID (1H19 revenue), while hospital services are back to pre-COVID levels.

Raffles Medical - Outlook

• Steady return of foreign patients achieving 60% of pre-COVID level; expect to hit pre-COVID levels by year-end. From May-June 2022, post travel borders reopening in Apr 22, Raffles Medical has seen a steady return of foreign patients. Management believes that foreign patient volumes are at ~60% of pre-COVID levels and hopes to see a full return by year-end, especially when China’s travel borders reopen.
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• Management believes that the strong margins could be sustainable, despite not having to raise prices. Management has been managing its cost and improving operating efficiency to drive margins.
• Expected gestation losses for FY22F in line with guidance. While China hospitals were impacted by the lockdowns, management saw patient volume in Chongqing doubling despite the lockdown. Barring further lockdowns, management believes that the hospital operations would progressively return to normalcy. The expected gestation losses are in line with the previous guidance of S$10m for year 1 of operations (Raffles Hospital Shanghai), S$3-S$5m for year 2 of operations (Raffles Hospital Chongqing), and breakeven in year 3.
• We believe the new IVF/Assisted Reproductive Therapy centre at Le Cheng, Hainan has great potential in the long term. Management explained that Le Cheng in Hainan is a dedicated healthcare hub set aside by the Chinese Government. Given that this is a specialised healthcare hub, the Chinese Government could allow the usage of medication that may not be accessible in the rest of China. As such, management sees the potential to eventually expand it into a cancer specialised centre in Le Cheng that could allow patients access to drugs that would previously not be accessible.
• The capex for the IVF centre is minimal (~S$10m), as Raffles Medical will be renting a floor from the specialised healthcare hub.
• We see positives for the IVF centre, where approvals/licenses in China are hard to obtain and believe there could be great potential if Raffles Medical could expand further into cancer treatment in Le Cheng. However, we believe it is still too early to determine the significance of the contribution and continue to keep it in view for further developments.

Maintain BUY recommendation on Raffles Medical

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Rachel Lih Rui TAN DBS Group Research | https://www.dbs.com/insightsdirect/ 2022-08-02 SGinvestors.io

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