Can “Raffles Medical” Reclaims Past Glory by Betting on China?

Raffles Medical Group (RMG) use to be the darling stock in SGX with an exceptional strong balance sheet, growing earnings yoy, plus attractive dividends.

(Note: all price in SGD unless otherwise mentioned)

From end 2008, the share price has rose from a low of 0.6, to a peak of ~5.0 in the 2015-2016 period. In early 2016, the company announced a 3-1 share split. From 2016 onwards, RMG’s share price has been declining from 1.55 to 1.0 by the end of 2019, and a further 20 percent tumble this year. All in all, the share price has almost halved since 4 to 5 years ago. And, if you would have bought the stock eight years ago, you be seeing zero growth in share price, aside from the dividends collected.

WHY THE DRASTIC PRICE DECLINE? 

RMG has been able to grow its revenue yoy despite the share decline. Revenue rose 27 percent from 410 million in 2015 steadily to 522 million in 2019. Profit After Tax (PAT) is also pretty consistent from 2015 to 2018 averaging 69-70 million.

What has caused the decline in share price?

The company 2019 profit suffered a decline to 60 million (17 percent fall from previous year), and 1H2020 results compounded more pain due to the Covid pandemic, giving rise to a sharp decline of 41.6% earnings from 27.9 million in 1H2019 to 16.3 million this year.

Still, the fall in earnings does not justify the colossal decline of the share price.

So, what is the reason?

In my opinion, it is the over-aggressive expansion, weakening the balance sheet and the gestation period of several years ahead for the expansion investments to turn into earnings.

OVER-AGGRESSIVE EXPANSION 

Since 2014, RMG had undergone very aggressive expansion. In fact, over-aggressive in my opinion within a short space of time! 2014 saw S$310m spent on the extension of hospital in Singapore adding 220k sqft. The bigger facility is opened in early 2018.

Next, the construction of a 5-storey commercial building in Holland Village having 65k sqft of gross floor area with medical, banking (DBS), retail, food and beverage services. This is another S$65m spent, officially opened end 2016.

In 2015, it announced expansion into Shanghai with new 400 beds hospital at Pudong area. It is due to be opened by end of this year barring any unforeseen circumstances ahead.

Then in 2017, the announcement on the development of its second international tertiary hospital in China, Chongqing costing approximately 800million yuan. The Chongqing facility opened in Jan 2019 as a 150 bedders, scalable to 700 bedders.

RMG’s Management maintained EBITDA loss guidance for both China hospitals of S$8-10m in the first year and S$4-5m in the second year before breaking even in the third year of operation. But with Covid, breakeven will likely be longer than the anticipated 3 years.

Due to the expansion, RMG is in net debt position with a net gearing of 1.8%.

However, the good news is, Shanghai facility is almost completed meaning it is unlikely to require huge fresh cash injection for its construction.

Currently, RMG is holding 152.6 million of cash with a debt of 168 million.

NOT EXACTLY CHEAP 

Taking RMG’s Market cap as 1.47 billion, then 2019 earnings will provide a P/E ratio of 25.

Let’s take a look at 2020.

First half year drastic fall in earnings to 16.3 million is very much due to the impact of Covid, especially China/HK region. RMG highlighted that if we excludes the results of China Healthcare Division (Raffles Hospital Chongqing, Raffles China Clinics and Raffles Medical Hongkong) which had been severely impacted by Covid in 1H2020, the Group’s PAT would have been 31.2 million as compared to 32.3 million in 1H 2019, a diminution of 3.7% (1.1 million).

The second half result is expected to improve.

Assume 2020 earnings of 44 million as predicted by one of the analyst reports, then this will translate to forward P/E ratio of 33.4.

It ain’t exactly cheap!

THE GROWTH FACTORS – CHINA! 

It is not all bad. The Covid situation in China is expected to improve compare to 2020, barring any unforeseen circumstances. Hence 2021 earnings are expected to improve.

Furthermore, the group is on track for the opening of Raffles Hospital Shanghai this year with equipment ready and staffs recruited.

In a recent interview, Dr Loo, the executive chairman and co-founder of the group said:

“Well, we had the honour of being designated as a hospital for foreigners. But there aren’t many foreigners in Chongqing – about 5,000 but people do come to us. We are beginning to have traction with the locals with who surely must be the main group of patients we’re looking for. 

And this year we got the Yibao. Yibao is a local insurance to supplement the costs. Since then, we have been getting more traction. 

People are coming to our hospital to deliver babies, get fractures treated. Already we are better, much better known now in Chongqing and surrounding areas than a year ago.

We are here to serve Chinese patients, and expatriates are just ‘by the way’. How many expatriates in China? Two million? How many top 20 per cent people in China? About 280 million. That’s 40 times more than Singaporeans,” 

Loo also said that he believed the Chongqing and Shanghai ventures could break even in three years, and in 10 years the revenue from China could be the same, or even bigger, than the company’s earnings in Singapore.

But Loo is also being prudent. “It is a serious undertaking. I’ve seen lots of hospitals starting well and then going no where. Even if you give people free stays, they don’t necessarily want to come,” he said.

CONCLUSION 

The group is betting heavily on the success of its China Hospitals. If Dr Loo is correct, then RMG earnings will grow two folds in ten years bring a double bagger share price in two years.

Notwithstanding the growth in China, there are also risks.

Firstly, in the next 3-4 years, earnings will still very much depends on the main Singapore business. And borders really need to open to supplement the local patients with foreign ones, since more than 30% of RMG’s Hospital revenue is derived from foreigners.

Singapore has always planned ahead for aging and growing population, leading to over-supply of hospitals here, in the past decade. According to MOH website, there are 19 acute hospitals, 9 community hospitals, 20 public polyclinics and 2,304 private clinics in 2019. With a population size of less than 6 million, the local healthcare competition is intense and tough.

Lastly, China is not an easy country for foreigners to set up business there, especially more in the healthcare industry. This complexity, together with competition from local Chinese Hospitals may prolonged the gestation period of RMG’s breakeven there? 

Nonetheless, Dr Loo also said that he has waited 34 years to reach where he is today:

“I have studied China’s system for 34 years. I walked through 100 hospitals in China and made friends with hospital presidents, physicians, consultancies all over the country … we are not typical foreigners.”

WHAT YOU THINK?

Unfortunately, I bought into the shares during RMG’s heydays and have a few rounds of averaging in the past few years. Today, I am reeling from the pain of the share decline. Without saying, I am hoping for the success in China to pull the share price of RMG up.

Read my previous articles:

Why is Raffles Medical Great? – Facts & Figures

Why is Raffles Medical Great? – A tale of personal experience!

Meanwhile, do you believe in RMG’s narrated success story in China?

Will you consider to add the shares of RMG into your investment portfolio?

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