Health Care / Singapore RFMD SP Health Care / Singapore 3 March 2014

Raffles Medical Group

Raffles Medical Group Target (SGD): 3.68 Upside: 14.3% RFMD SP 28 Feb price (SGD): 3.22

Initiation: a healthy diagnosis 1 Buy • We see a compelling medium-term earnings growth story: a 2 Outperform (initiation) 2015-18E EPS CAGR of 17.2% versus 9.7% over 2012-15E 3 Hold • RMG’s China expansion opportunity appears under- 4 Underperform appreciated; 2015-18E EPS could rise to 26% 5 Sell • We initiate coverage with an Outperform (2) rating and 6-month target price of SGD3.68

How do we justify our view?

could rise to 26% as a result, which ■ Valuation we find appealing. We initiate coverage of RMG with an Outperform (2) rating and 6-month The key issue for investors in RMG DCF-based target price of SGD3.68. would likely centre around Jame Osman valuations – the shares are trading ■ Risks (65) 6321 3092 currently at a 2014E PER of 25.7x, Any delays in its expansion plans [email protected] which is around a 12% discount to would be the key risk to our call. its regional peers. Ramakrishna Maruvada (65) 6499 6543 We believe this valuation is justified [email protected] Share price performance given the defensive nature of the company’s business, its strong (SGD) (%) 3.6 110 ■ Investment case balance sheet (net cash), track record of management execution, 3.4 105 In our view, Raffles Medical Group 3.2 100 (RMG), a leading private healthcare and the relative scarcity of quality 3.1 95 services provider in Singapore, healthcare plays in Singapore. We 2.9 90 offers a compelling medium-term note that Thomson Medical and Feb-13 May-13 Aug-13 Nov-13 Feb-14 earnings growth story on the back of Parkway Holdings were de-listed in Raffles Me (LHS) Relative to FSSTI (RHS) its hospital expansion plans in 2011 at much higher PERs – Singapore and planned foray into estimated at 33x and 37x, 12-month range 2.90-3.52 China. respectively. Market cap (USDbn) 1.40 3m avg daily turnover (USDm) 0.94 ■ Catalysts Shares outstanding (m) 550 We forecast RMG’s earnings CAGR Major shareholder Raffles Medical Hldgs Pte Ltd. (38.7%) to accelerate from 9.7% in 2012-15 In the coming months, we expect RMG to reveal the nature and scope to 17.2% over 2015-18 on the back of Financial summary (SGD) its recently unveiled plans to expand of its expansion plans in China, Year to 31 Dec 14E 15E 16E its flagship Raffles Hospital and which would help the market better Revenue (m) 384 431 530 develop a specialist medical centre quantify the opportunity involved. Operating profit (m) 80 89 109 Further, we also expect the company Net profit (m) 69 76 95 at Taman Warna. Core EPS (fully-diluted) 0.125 0.139 0.172 to announce more details on its EPS change (%) 3.4 10.9 24.1 RMG’s China market potential is Singapore expansion plans (own-use Daiwa vs Cons. EPS (%) (3.6) (6.8) (2.1) perhaps under-appreciated by and tenancy mix; anchor tenants for PER (x) 25.7 23.2 18.7 investors given the preliminary the space that will be leased), which Dividend yield (%) 1.4 1.5 1.9 should help validate our forecasts DPS 0.044 0.049 0.060 nature of its plans. Our back-of-the- PBR (x) 3.4 3.1 2.8 envelope calculations suggest that and partly address concerns over EV/EBITDA (x) 19.3 18.0 15.0 the company’s 2015-18E EPS CAGR execution risks. ROE (%) 13.9 14.1 15.9 Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 27 Health Care / Singapore RFMD SP 3 March 2014

Contents

A healthy diagnosis ...... 6 Investment thesis ...... 6 Growth in Singapore ...... 7 Overseas expansion ...... 10 Medical tourism ...... 11 Competitive environment ...... 12 Financials and forecasts ...... 15 Valuation ...... 17 Key investment risks...... 18 Appendix I – Company background ...... 20 Introduction ...... 20 Shareholding structure and management ...... 21 Appendix II – The Singapore healthcare landscape ...... 23 An overview ...... 23

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1 Buy How do we justify our view? 2 Outperform (initiation)

3 Hold  Growth outlook

4 Underperform  Valuation 5 Sell  Earnings revisions

 Growth outlook  RMG: earnings-growth trend We expect the completion of the proposed Raffles (%) 20 Hospital extension, as well as the Taman Warna 17.2 development, to contribute strongly to earnings from 18 16 2H16 onward. While we see moderate earnings growth 13.0 prospects in the near term (2009-12 CAGR of 13%; 14 12 2012-15E CAGR of 10%), we believe the company’s 9.7 10 earnings growth is set to accelerate in the medium term 8 (we forecast a 2015-18 EPS CAGR of 17%). 6 4 2 0 2009-12 2012-15E 2015-18E Source: Company, Daiwa forecasts

 Valuation  RMG: 12-month forward PER ratio (x)

RMG’s share price has been rerated significantly since 12M forward PER (x) early 2009, as it continued to post solid results in the aftermath of the global financial crisis. We believe 26.0 +2 stdev demand for private healthcare services in Singapore will +1 stdev 21.0 remain healthy amid robust economic growth. We Mean expect the stock to be rerated further over the next 6-12 16.0 months as further details are announced relating to its -1 stdev expansion plans domestically and overseas, which 11.0 -2 stdev should provide a clearer picture of the revenue streams and timelines for these developments. Our 6-month 6.0 target price of SGD3.68 is based on a DCF approach. Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Our target price translates into a 2014E PER and PBR of Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 29.4x and 3.9x respectively, based on our forecasts. Source: Bloomberg, Daiwa forecasts

 Earnings revisions  12-month Bloomberg EPS forecast revisions The 2014 and 2015 Bloomberg consensus EPS forecasts 0.18 have seen downward revisions over the past 12 months, 0.17 possibly as management may have been too aggressive in its guidance. 0.16

Our 2014 and 2015 EPS forecasts are about 4-7% lower 0.15 than those of the Bloomberg consensus, mainly because 0.14 we expect space constraints at Raffles Hospital to limit the expansion of services. However, we believe the 0.13 completion of the hospital extension and Taman Warna 2-Oct-13 5-Feb-14 6-Mar-13 4-Dec-13 10-Jul-13 31-Jul-13 8-May-13 17-Apr-13 23-Oct-13 19-Jun-13 15-Jan-14 13-Feb-13 27-Mar-13 21-Aug-13 11-Sep-13 13-Nov-13 25-Dec-13 property in 2H16 will drive growth significantly from 29-May-13 2016E onward. Consensus 2014 EPS Consensus 2015 EPS Source: Bloomberg

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Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E No. of clinics 76.0 79.0 79.0 81.0 83.0 88.0 93.0 98.0 Average bill size growth rate (GP 7.0 1.4 10.3 8.4 4.6 9.0 9.0 5.0 clinic) (%) Average bill size growth rate 0.0 0.0 0.0 1.7 4.9 2.0 2.0 3.0 (specialist services) (%)

 Profit and loss (SGDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Healthcare services 89 94 103 115 123 142 164 181 Hospital services 130 145 167 194 217 239 265 344 Other Revenue 0 0 2 3 2 3 3 5 Total Revenue 219 239 273 312 341 384 431 530 Other income 13244444 COGS (25) (27) (32) (39) (38) (45) (51) (62) SG&A (126) (139) (158) (182) (202) (228) (257) (314) Other op.expenses (23) (24) (25) (29) (31) (35) (39) (48) Operating profit 45 53 60 66 74 80 89 109 Net-interest inc./(exp.) (0) 0 (0) 0 1 1 (0) 1 Assoc/forex/extraord./others 0 0 0 0 20 0 0 0 Pre-tax profit 45 53 59 67 95 80 89 110 Tax (7) (8) (9) (9) (10) (11) (12) (15) Min. int./pref. div./others (0) (0) (0) (0) (0) (0) (0) (0) Net profit (reported) 38 45 50 57 85 69 76 95 Net profit (adjusted) 38 45 50 57 67 69 76 95 EPS (reported)(SGD) 0.073 0.087 0.095 0.105 0.154 0.125 0.139 0.172 EPS (adjusted)(SGD) 0.073 0.087 0.095 0.105 0.121 0.125 0.139 0.172 EPS (adjusted fully-diluted)(SGD) 0.073 0.087 0.095 0.105 0.121 0.125 0.139 0.172 DPS (SGD) 0.030 0.035 0.030 0.045 0.050 0.044 0.049 0.060 EBIT 45 53 60 66 74 80 89 109 EBITDA 52 60 67 74 82 88 98 121

 Cash flow (SGDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Profit before tax 45 53 59 67 95 80 89 110 Depreciation and amortisation 7 7 7 8 8 9 9 12 Tax paid (6) (7) (6) (9) (10) (11) (12) (15) Change in working capital 1 (3) 3 6 0 4 4 8 Other operational CF items 1 (2) 0 (2) (23) (5) (5) (7) Cash flow from operations47496369707685109 Capex (4) (5) (115) (10) (8) (241) (131) (120) Net (acquisitions)/disposals 0 2 0 0 119 0 0 0 Other investing CF items 0 0 0 (1) (0) 1 0 1 Cash flow from investing (4) (3) (114) (10) 111 (240) (131) (118) Change in debt (2) (1) (1) (1) (15) 30 50 0 Net share issues/(repurchases) 1 4 3 4 6 0 0 0 Dividends paid (13) (16) (9) (9) (10) (24) (27) (33) Other financing CF items 0 0 0 0 0 0 0 0 Cash flow from financing (14) (13) (6) (6) (19) 6 23 (33) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 30 33 (58) 52 162 (159) (22) (43) Free cash flow 43 43 (51) 59 62 (165) (45) (11) Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (SGDm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 74 107 50 102 266 108 87 46 Inventory 5 5 5 5 9 10 11 14 Accounts receivable 2426323844505669 Other current assets 10000000 Total current assets 104 138 87 146 319 168 154 128 Fixed assets 146 144 142 154 154 164 177 286 Goodwill & intangibles 0 0 0 00000 Other non-current assets 86 89 200 195 100 326 440 442 Total assets 337 372 429 495 574 659 771 856 Short-term debt 5 5 5 20 5 35 85 85 Accounts payable 52 51 55 66 73 82 92 113 Other current liabilities 9 10 16 17 20 21 23 26 Total current liabilities 65 65 76 104 98 138 199 223 Long-term debt 20 18 16 00000 Other non-current liabilities 1 2 2 22222 Total liabilities 87 85 94 105 100 140 202 225 Share capital 173 177 190 207 228 228 228 228 Reserves/R.E./others 77 109 144 181 244 289 339 400 Shareholders' equity 250 286 334 388 473 517 567 629 Minority interests 01111222 Total equity & liabilities 337 372 429 495 573 659 771 856 EV 1,722 1,688 1,744 1,690 1,512 1,700 1,772 1,813 Net debt/(cash) (50) (85) (28) (83) (261) (73) (2) 39 BVPS (SGD) 0.482 0.551 0.635 0.727 0.867 0.940 1.031 1.143

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales (YoY) 8.9 9.4 14.1 14.2 9.4 12.6 12.4 22.8 EBITDA (YoY) 14.8 14.4 11.3 11.2 10.7 7.1 11.6 23.0 Operating profit (YoY) 16.6 16.5 12.3 11.5 11.4 7.5 11.9 22.4 Net profit (YoY) 20.1 19.5 11.3 12.8 17.2 3.4 10.9 24.1 Core EPS (fully-diluted) (YoY) 19.7 18.5 9.8 10.8 15.0 3.4 10.9 24.1 Gross-profit margin 88.8 88.9 88.2 87.6 88.8 88.2 88.2 88.2 EBITDA margin 24.0 25.1 24.5 23.8 24.1 22.9 22.8 22.8 Operating-profit margin 20.8 22.2 21.8 21.3 21.7 20.7 20.6 20.6 Net profit margin 17.3 18.9 18.5 18.2 19.5 18.0 17.7 17.9 ROAE 16.1 16.9 16.2 15.7 15.5 13.9 14.1 15.9 ROAA 11.7 12.8 12.6 12.3 12.5 11.2 10.7 11.7 ROCE 17.4 18.1 17.9 17.3 16.7 15.4 14.7 15.9 ROIC 19.0 22.5 19.9 18.6 25.5 20.9 15.2 15.2 Net debt to equity net cash net cash net cash net cash net cash net cash net cash 6.2 Effective tax rate 15.6 14.3 14.8 14.1 10.4 13.5 13.5 13.5 Accounts receivable (days) 41.1 38.4 38.8 41.0 44.1 44.7 44.7 43.0 Current ratio (x) 1.6 2.1 1.1 1.4 3.3 1.2 0.8 0.6 Net interest cover (x) 110.9 n.a. 850.1 n.a. n.a. n.a. 387.3 n.a. Net dividend payout 41.1 40.5 31.6 42.7 32.4 35.0 35.0 35.0 Free cash flow yield 2.4 2.4 n.a. 3.3 3.5 n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

 Company profile Raffles Medical Group, founded in 1976, has grown to be one of the largest private healthcare providers in Singapore. It operates a chain of clinics and medical centres mainly in Singapore, with three clinics in Hong Kong and one in Shanghai. In addition, Raffles Hospital was established in 2002 to provide inpatient and outpatient tertiary care, and sees about a third of its patients from overseas.

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accelerate in the medium term (we forecast a 2015-18 EPS CAGR of 17%).

In our view, RMG’s near-term share-price performance could be supported by positive news flow over the next 6 months relating to the company’s major expansion A healthy diagnosis plans both domestically and overseas, which we believe offer a compelling medium-term earnings-growth Expansion plans in the pipeline should story. propel RMG into the next stage of growth  RMG: expected upcoming announcements 2Q14 Further project details and commencement of construction of proposed hospital extension Investment thesis 2Q14 Further project details and commencement of construction of Taman Warna property at Holland Village 1H14 Details on scope and timeline for the development of two hospitals (a 200-bed hospital We initiate coverage of RMG with an Outperform (2) in Shenzhen and 300-bed hospital in Shanghai) following preliminary agreements rating and DCF-based 6-month target price of signed in 2013 Source: Company, compiled by Daiwa SGD3.68. RMG is a leading private healthcare services provider in Singapore which operates a chain of clinics, Other investment merits as well as a tertiary hospital. The company also provides traditional Chinese medicine (TCM), RMG offers several investment merits for investors healthcare insurance and consulting services, and seeking exposure to one of the few listed healthcare distributes its own line of branded healthcare products. players in Singapore: 1) The company has established a solid track record of Recent key developments under- consistent operational growth. It achieved a revenue appreciated CAGR of 13.5% over the 2002-12 period, while EPS RMG’s medium-term earnings growth prospects expanded at an impressive 24.6% CAGR over the underpin our positive thesis on the stock. In January same period. 2014, the company announced major plans to 2) Overseas expansion plans present a strong rerating redevelop Raffles Hospital, which will see a 72% catalyst for the stock – in 2013, the company signed expansion in gross floor area (GFA). At the same time, 2 agreements for the development of hospitals in the company unveiled details on the proposed China (one in Shenzhen and another in Shanghai). redevelopment of a recently acquired property at As they are still in the preliminary stages, we have Taman Warna (December 2013). not factored these potential developments into our forecasts.  RMG: earnings-growth trend (%) 3) RMG’s valuation remains reasonable, in our view, 20 with the stock trading at a 2014E PER and PBR of 17.2 18 25.7x and 3.4x, respectively, based on our forecasts, 16 which is around a 12% discount to its regional peers 14 13.0 (6% excluding IHH). 12 9.7 10 4) Strong balance sheet and operating cash flow – as at 8 end-2013, it had SGD261m in net cash (SGD141m 6 excluding proceeds from the sale of the Thong Sia 4 building in 4Q13). Operating cash flow rose at a 2 CAGR of 18.5% over the 2002-12 period. 0 2009-12 2012-15E 2015-18E Why are our 2014-15 forecasts below Source: Company, Daiwa forecasts consensus?

In our view, the significance of these developments We note that our 2014-15E EPS forecasts are 4-7% appears under-appreciated by investors, particularly as below the Bloomberg-consensus forecasts – mainly as its hospital services segment is a key segment of the we expect space constraints at the existing Raffles business (accounting for around 60% of total revenue). Hospital premises to limit the growth of its hospital We believe the company’s earnings growth is poised to services segment until the expected completion of its expansion in 2Q16.

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Instead, we expect YoY revenue growth over the 2014- SGD513m. On our estimates, Thomson and Parkway 15E period to be driven by its healthcare services were delisted at PERs of 33x and 37x, respectively. segment (15-16%), as the company expands its clinic base in preparation for the completion of the hospital extension. This will ensure RMG has a steady stream of Growth in Singapore patient referrals for its specialist services at the expanded hospital in 2016. RMG has grown its operations from just 2 clinics in 1976 to 83 clinics as at end-2013 (79 clinics across In addition, we look for operating margins to decline by Singapore, as well as 3 medical centres in Hong Kong 1.1 pp over the 2014-15E period, due to: 1) increased and one in Shanghai). In addition, Raffles Hospital was hiring and training of staff ahead of the hospital officially opened in March 2002 to provide both expansion, and 2) higher revenue growth of its inpatient and outpatient tertiary care, and has since healthcare services segment, which has lower margins become a landmark in the Bugis vicinity of Singapore. relative to its hospital services segment. The company enjoys strong brand equity – the Raffles Medical brand is well recognised in Singapore. Share price performance RMG’s share price has outperformed the domestic  RMG: Raffles Hospital at Bugis benchmark STI Index annually all but once in the past decade (2004-13). On a regional basis, the share prices of healthcare companies witnessed a sector-wide rerating in early 2009, in the aftermath of the global financial crisis, as investors sought relative safety in defensive sectors, including healthcare.

 RMG: annual share-price performance (2002-13) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Raffles Medical (12.5) 42.9 18.8 24.2 64.4 71.2 (54.3) 110.1 64.8 (11.3) 23.6 18.7 STI (20.3) 32.8 15.6 14.0 28.0 18.7 (49.2) 64.5 10.1 (17.0) 19.7 0.0 Source: Bloomberg

 RMG: comparative 5-year share price performance (%) 1,400 1,200 1,000 Source: Daiwa 800 600 As a result, RMG has built a solid track record, 400 achieving a revenue CAGR of 13.5% over the past 200 decade (2002-12). Looking ahead, the company has 0 outlined firm plans to continue its growth domestically. (200) -06 -13 r-11 p y p Revitalising Raffles Hospital Jul-07 Jul-12 Apr-06 A Oct-13 Oct-08 Jan-05 Jun-05 Jan-10 Jun-10 Feb-07 Feb-12 Mar-09 Dec-07 Sep-11 Dec-12 Nov-05 Se Aug-09 Nov-10 May-08 Ma RMG STI Index Bumrungrad KPJ RMG announced in January 2014 that it had acquired a

Source: Bloomberg land site adjacent to Raffles Hospital from the Singapore Land Authority, for a purchase In Singapore, interest in the healthcare sector consideration of SGD105.2m. Prior to this acquisition, accelerated further in 2011, following the acquisition of the company had announced in July 2010 plans for the Singapore hospital operator Parkway Holdings by construction of an extension of the hospital, after it had Khazanah in July 2011 (which was subsequently secured approval from the Urban Redevelopment relisted under Integrated Healthcare Holdings [IHH, Authority to increase the plot ratio of its existing land Not rated] in July 2012), in a deal worth USD2.6bn from 4.2 to 5.6. (SGD3.4bn), which was also fiercely contested by India’s Fortis Healthcare.

In the same year, investor Peter Lim successfully made a bid to take Thomson Medical Centre private for

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 RMG: adjacent land site for proposed hospital extension (next • Expanding the range of specialist centres in both to Bugis train station) new and existing fields. • Developing centres of excellence which will allow the company to build on its clinical research activities. • Establishing a new training arm to provide healthcare training services to clinical staff both internally and externally.

In addition, we expect the extension to also allow the company to increase ward space in response to an increase in demand for inpatient services. We expect the number of operational (ie, an available licensed bed) beds (which has remained unchanged since 2007) to increase from 200 currently to 250 (the hospital is licensed for 380 beds) as a result.

In our view, the proposed redevelopment is significant Source: Daiwa in scale, and will be instrumental in propelling the

company’s operations into the next stage of growth. We In total, the extension of its existing hospital premises, believe the company’s earnings growth is set to combined with the development of this newly acquired accelerate in the medium term (we forecast a 2015-18E adjacent site, would yield a total gross floor area (GFA) EPS CAGR of 17%). increase of 20,612 sq m (221,871 sq ft) – representing a

72% increase. Both the existing hospital site and adjacent site are 99-year leasehold properties, with a Development at Taman Warna coterminous period with effect from 1 March 1979 (65- In February 2011, RMG acquired a 7-storey podium year lease remaining). block (totalling 42,668 sq ft) at Bideford Road (Thong Sia building) at a cost of SGD92.1m, with the intention  RMG: proposed Raffles Hospital redevelopment of converting the space into a specialist centre located (sq m) close to Orchard Road, the main shopping district of 50,000 Singapore. 45,000 ~70% GFA 40,000 increease However, the company was twice unsuccessful in its 35,000 30,000 bid to secure approval from the relevant authorities to 25,000 convert the space for this purpose. Eventually, the 20,000 company sold the building in September 2013 to real- 15,000 estate investor Kishore Buxani for SGD120m, at a 10,000 SGD21.4m gain. 5,000 0 Current Proposed redevelopment Following this, the company announced in December Existing Hospital GFA Adjacent site acquired Proposed extension 2013 that it had acquired a property at 100 Taman Warna from DBS Bank at a cost of SGD54.8m. It plans Source: Company to spend a further SGD65m to redevelop the property, Management estimates total development costs which will have a total floor area of 62,720sq ft when (including the cost of the land) of around SGD310m; fully built up. Of this, it estimates a total of 41,931sq ft construction is expected to begin in 2Q14 and be in lettable area. RMG will utilise 9,000sq ft of this completed around 2Q16 (24 months). The purchase lettable space to open a specialist centre, while it plans consideration had been satisfied in cash, with the to lease the remaining space for retail and food & remaining development costs to be funded through a beverage outlets. We expect construction to begin in combination of internal resources and bank 1Q14 and temporary occupancy permit (TOP) status to borrowings. be obtained by 1Q16.

The proposed redevelopment of Raffles Hospital will provide much-needed space for various initiatives:

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 RMG: proposed Taman Warna development at Holland Village 8% over the same period. According to a white paper published by the government (A sustainable population for a dynamic Singapore, January 2013), it projects a total population as large as 6.9m people by 2030E.

At the same time, Singaporeans are expected to live longer, as the average life expectancy in Singapore has risen from 73.1 to 79.9 for males and 77.6 to 84.5 for females from 1990-2012. This has led to an increasingly ageing population – elderly persons (aged 65 and above) comprised 10.5% of Singapore’s resident population in 2013 (vs. 6.0% in 1990) (see table below).

Source: Google Maps  Singapore: age distribution of resident population Age Group (Years) 1990 2000 2010 2012 2013 In our view, the decision is largely a positive one Total (%) 100.0 100.0 100.0 100.0 100.0 overall as: Below 15 23.0 21.9 17.4 16.4 16.0 15-24 16.9 12.9 13.5 13.7 13.6 1) the location of the proposed development is situated 25-34 21.5 17.0 15.1 14.4 14.4 in the Holland Village district of Singapore, which is 35-44 16.9 19.4 16.7 16.3 16.1 45-54 9.0 14.3 16.6 16.5 16.4 slated for further government development, 55-64 6.7 7.2 11.7 12.7 13.1 2) it will be directly accessible by the nearest Circle 65 & Over 6.0 7.2 9.0 9.9 10.5 Line train station (Holland Village MRT), and Median Age (Years) 29.8 34.0 37.4 38.4 38.9 3) we expect the company to scale up the expansion of Source: Singapore Department of Statistics its specialist services progressively and reduce the space leased out to third parties should demand for According to the MOH, it estimates one in every 5 medical services increase – much like it did for Singaporeans (20%) will be above the age of 65 by Raffles Hospital. 2030E, which represents more than a two-fold increase to 960,000 from about 400,000 currently. Clinic base still has room to grow  Singapore Healthcare: increase in average life expectancy In our view, RMG still has significant headroom to grow its clinic base. In contrast to the tertiary 83 82.3 healthcare market, private clinics comprise around 82

80% of the base for primary care in Singapore, with the 81 80.3 remaining 20% fulfilled by government polyclinics. 80

79 The primary care market is a fragmented one, with 78.0 numerous family clinics managed by small groups of 2- 78 3 general physicians (GPs). According to the Ministry 77 of Health (MOH), there are currently 18 polyclinics and about 2,400 private medical clinics providing primary 76 healthcare services. Even with 79 clinics in Singapore 75 as at end-2013, RMG’s clinic base represents only 2000 2006 2012 about 4% of the total number of clinics in Singapore. Source: Singapore Department of Statistics

The Singapore Government has taken steps to pre- Macro factors – a growing ageing populace empt this ‘silver tsunami’ by adopting a holistic step- and economic growth down care approach toward cushioning the potential While the direct effects may be difficult to quantify, societal and economic impact. The Agency for several demographic and macroeconomic factors are Integrated Care (AIC) was formed as an independent likely to signal underlying growth trends in the corporate entity under MOH Holdings (MOHH) in Singapore healthcare market: 2009 to coordinate, manage and monitor patient referrals to the entire spectrum of long-term care 1. A growing ageing populace. Singapore’s services. population grew at a rapid rate (+21%) over the 2006- 12 period, while its resident population increased by - 9 - Health Care / Singapore RFMD SP 3 March 2014

In our view, the demand for services associated with an serve its corporate customer base, as well as provides ageing populace (eg, cardiovascular disease, cancer, training and consultancy services for the industry. This arthritis, cataracts, osteoporosis, diabetes, ability to consistently and progressively expand its hypertension and Alzheimer’s disease) should continue service offerings has largely contributed to the to be a key trend across healthcare providers such as company’s strong revenue growth. RMG. According to the company, it has increased its focus on several specialist areas: oncology,  RMG: number of physicians orthopaedics, cardiology and obstetrics and 300 gynaecology (OBG) in anticipation of an increase in 247 250 232 demand for such services. 224 200 2. Healthcare spending as a percentage of GDP. Typically, strong economic growth in developed 150 80 85 countries such as Singapore is associated with a higher 100 70 incidence of chronic diseases (heart disease, obesity, diabetes, etc.), due largely to shifts in lifestyle and diet. 50 According to the Health Promotion Board (a 0 government body established to manage health 2011 2012 2013 promotion and disease prevention in Singapore) one in Physicians (including specialists) Specialists 4 Singaporeans aged 40 years and above has at least Source: Company one chronic disease. Most recently, the company opened a neuroscience  Singapore Healthcare: chronic disease burden (prevalence specialist centre in 2012 with 3 neurologists, as well as among adults aged 18 to 69 years) doubled its number of oncologists from 2 to 4. We (%) expect the extension of Raffles Hospital to enable the 30 company to continue expanding its range of services 25 into other medical specialties, as well as develop

20 centres of excellence and research facilities which will ensure it retains a competitive advantage in terms of 15 providing high quality medical care. 10 5 Overseas expansion 0 1992 1998 2004 2010 Still on the cards Hypertension Diabetes Obesity Source: MOH Following strong organic growth in the Singapore market, RMG has been keen to leverage on its expertise In per capita terms and as a percentage of GDP, and branding overseas. Overseas expansion has been a Singapore’s healthcare expenditure is the lowest in all challenging endeavour for RMG – management has the high-income countries in the world – a testament been cautious in this area of the business, as unfamiliar to the low-cost, high-quality standard of its healthcare terrain presents a different set of challenges (seeking industry. However, we expect the healthcare adequate quality healthcare personnel, dealing with expenditure of Singaporeans to grow in tandem with a local regulations, local competition, etc.). higher incidence of chronic diseases – private healthcare providers such as RMG are likely to be key Hong Kong beneficiaries of such a trend, in our view. RMG opened its first medical clinic in Hong Kong in 1995 and currently operates a total of 3 clinics in the Progressively expanding its suite of country. In March 2013, it lost a tender to build and services run a greenfield hospital in the city’s Aberdeen district RMG has been successful at progressively expanding its to GHK Hospital Ltd, a 40-60 joint venture between range of services – from basic primary care at its clinics NWS Holdings Ltd and Parkway HK Holdings (wholly to more complex tertiary care at its hospital and owned by IHH). While no new plans have been specialist centres. In addition, it also offers dental announced since then, we believe Hong Kong services, produces and distributes its own brand of continues to be an area where RMG may seek to healthcare products, writes health insurance policies to develop its existing clinic network.

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China in China, which it sees as having the greatest potential In 2010, RMG opened its first medical centre in for growth. Shanghai. Located in the Innov Tower in a business park along Hong Mei Lu, it serves both the expatriate and local community in the region. Since then, the Medical tourism company has taken steps to build its network in the country: Still a relevant story 1) In February 2013, RMG entered into a non-binding With about 30% of its hospital admissions comprising agreement with China Merchants Group to negotiate foreign patients, medical tourism contributes a potential deal toward building a 200-bed private significantly to RMG’s hospital services segment. hospital in an industrial zone in Shekou, Shenzhen Further, the success of several high-profile at an estimated project cost of around SGD150m. international cases, such as the separation surgery of The proposed hospital will provide high-end medical conjoined Korean twins Ji Hye and Sarang in 2003, has services in the Pearl River Delta region to foreigners raised its profile on the global map significantly. and local residents. RMG has established patient liaison offices in 2) In September 2013, RMG announced a framework numerous countries including Indonesia, Vietnam, agreement with Shanghai Binjiang International Cambodia, Brunei, Bangladesh and Russia, which Tourism Development Co. (a subsidiary of Shanghai engage in marketing activities and assist prospective Lujizui Co. Ltd), to collaborate on developing an patients seeking medical treatment in Singapore by integrated international hospital in the central handling administrative requirements (travel business district of Qiantan, Pudong, in Shanghai. documents, booking medical appointments etc.). In The proposed hospital is expected to house more addition, overseas patients are also referred to Raffles than 300 beds at an estimated cost of SGD250m, Hospital through associate networks, international and will provide high-end medical services to both insurance companies, medical assistance organisations local and international patients. and other partners.

 RMG: proposed development of hospitals in China According to figures released by the Singapore Tourism Project details Hospital Shekou, Shenzhen Board, medical tourist receipts amounted to SGD1.1bn Partner China Merchants Group in 2012 and increased by 13-17% YoY over the 2010-12 No. of beds 200 period, following a decline in 2009 in the aftermath of Development cost (SGD m) 150 the global financial crisis. Frost & Sullivan forecasts Hospital Shanghai medical travel revenue and the number of medical Partner Shanghai Binjiang No. of beds 300 travellers to grow at CAGRs of 14.7% and 13.1%, Development cost (SGD m) 250 respectively, over 2011-16. Estimated return of projects SGD m  Singapore Healthcare: medical tourist receipts RMG's stake 200 (SGDm) ROIC (%) 25% 1,200 Estimated annual incremental net profit (from 2017E) 30 Net profit CAGR (2015-18E) 17.2% 1,000 Net profit CAGR including China (2015-18E) 26.1% Assumptions 800 50-50 equity JV stake 600 Debt funded Hospitals to be completed in 2017 400 China tax rate of 25% Source: Daiwa estimates 200

0 Details surrounding both agreements remain scant as the company is finalising project terms and obtaining 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 the necessary regulatory approval. Based on our back- Source: CEIC, STB of-the-envelope calculations, we estimate that these 2 hospitals could contribute around SGD30m annually in Singapore has been a key beneficiary of the medical incremental earnings. As a result, RMG’s net profit tourism market due to the following key factors: 1) it is CAGR over the 2015-18E period could rise to 26% home to a number of healthcare operators which are (versus our current forecast of 17.2%). We believe able to deliver a high standard of care, 2) it has a RMG’s management is focused on its expansion plans transparent and stable political and judiciary system,

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and 3) there is a high degree of accessibility (in terms complicated affair. In addition, Singapore continues to of obtaining a visa, securing transport and have the highest number of physicians per population accommodation, language and communication etc.). (1.82 per 1,000 people as at 2012) in Asia (ex-Japan), an indicator of the standard of healthcare in the In recent years, other countries in Asia have sought to country. boost their relative attractiveness as medical tourism destinations and narrow the gap. For example,  Global Healthcare: physician density (per 1,000 pop.) Thailand currently has 26 Joint Commission (per 1,000 pop) International (JCI) accredited hospitals, of which 12 3.00 have been accredited in the past 2 years alone (2012- 2.50 13). 2.00  List of JCI accredited hospitals across Asian countries 1.50 30 27 26 1.00 25

19 0.50 20

14 0.00 15 Thailand India Malaysia China Singapore Japan US UK 10 Source: WHO, based on latest available data 10 8 RMG says that around 22% of its foreign patients come 5 from regional neighbour Indonesia, while the 0 remainder hail from Malaysia, the Middle East, Russia, Malaysia Indonesia Singapore India Thailand China Cambodia, Myanmar, Vietnam, China, the UK and Source: JCI Australia. To cater to the needs of its international Note: based on website data checked on 20 Jan 2014 patients, RMG has set up an International Patients Centre within the hospital. Such patients tend to seek Domestic governments in these countries have also costlier treatments which include cardiac, orthopaedic, played an active role in enticing foreigners seeking neurological and spinal surgery, cosmetic surgery, and quality medical treatment. For example, in Malaysia, dental procedures. the government extended the stay period for medical visas from 30 days to 6 months in 2009. Competitive environment  Singapore Healthcare: cost comparison of key medical procedures (USD) Hospital bed additions over 2014-18 20,000 mainly address undersupply issues 18,000 16,000 14,000 A recent news report (“Hospitals facing severe bed 12,000 10,000 crunch take unusual steps”, Straits Times, 8 January 8,000 6,000 2014) highlighted the issue of a shortage of hospital 4,000 2,000 beds in Singapore – with several public hospitals 0 reportedly facing bed occupancy rates in excess of 100% (this occurs when the number of inpatient days, based on a daily census, exceeds the possible number Angioplasty Heart ValveHeart Replacement Heart Bypass Hysterectomy Spinal Fusion of operational bed days), leading to temporary make- Hip Replacement

Knee Replacement shift hospital beds being set up. Cognizant of this issue, India Thailand Singapore Malaysia the Singapore Government announced in October 2013 Source: Patient beyond borders (2008) plans to expand national healthcare capacity as part of the MOH’s Healthcare 2020 Masterplan. Despite the relatively higher cost of medical treatment One of the proposed developments, Seng Kang General in Singapore, we believe medical tourism remains a Hospital, will have 1,400 beds with an acute (1,000 relevant story for private healthcare players such as beds) and community hospital (400 beds) located side- RMG, mainly as it is able to offer a holistic experience by-side. This will make it one of the largest public for the patient. Comparatively, for example, patients hospitals in Singapore, after Singapore General could continue to be deterred by the political unrest in Hospital (1,700 beds) and Tan Tock Seng Hospital Thailand, while securing a visa in India remains a (1,200 beds). - 12 - Health Care / Singapore RFMD SP 3 March 2014

In total, around 3,700 hospital beds (both private and  Singapore Healthcare: hospital admission vs. population public) could be added from 2014-18, representing a growth trends 31% increase from the c.11,900 (both acute and long- (%) term beds) currently. While this may seem like a 6 significant increase, we believe the measure is 5 necessary to alleviate the stretched utilisation rates and 4 heavy patient loads faced by public sector hospitals. 3 2  Singapore Healthcare: upcoming hospital bed additions 1 (public & private) 0 Completion period No. of beds Ng Teng Fong General Hospital (inclusive of (1) Jurong Community Hospital) 2014 1,000 2006 2007 2008 2009 2010 2011 2012 Seng Kang General Hospital (inclusive of 2018 (brought forward from Total hospital admissions growth Private sector admissions growth cluster community hospital) 2020) 1400 Population growth rate Extension of Changi General Hospital 2014 250 Yishun and Outram Community Hospitals 2015 800 Source: MOH, Singstats Farrer Park Hospital (Connexion) (private) 2014 220 Total 3,670 Over the medium term, we expect this trend of Source: MOH Healthcare 2020 Masterplan relatively higher private hospital admission rates to continue, driven by the macro factors we highlight In the short term, the current bed crunch in public above (ageing population, higher chronic disease hospitals may spur patients who can afford private burden, short-term shortage of public hospital beds, healthcare to seek treatment at private hospitals. As etc.). RMG’s average bill size is lower than that of its key private hospital competitors, it would likely to be a key Upcoming private hospital has faced beneficiary of this trend. repeated delays

Overall, while the number of hospital beds per 1,000 Slated for completion in 2014, Connexion at Farrer population could rise to 2.67 by 2018E (from 2.20 in Park will be an integrated healthcare and hospitality 2013), we note that most of this capacity increase will complex. The development will comprise a specialist be in the public hospital space. We expect private medical centre with 189 consultation suites, a private hospital beds per 1,000 population to remain fairly 220-bed tertiary hospital, as well as a luxury hotel and constant at 0.50 in 2018E. retail space. The project is being developed and managed by The Farrer Park Company (formerly  Singapore Healthcare: number of hospital beds per 1,000 known as Singapore HealthPartners), a group of population private medical and hospitality specialists with several 2.50 foreign investors. 2.16 2.02 1.90 1.98 1.95 2.00  Proposed development of 220-bed Connexion at Farrer Park 1.72 1.70 1.75 1.72 1.73 1.70

1.50

1.00 0.67 0.62 0.50 0.47 0.50 0.50 0.53 0.52 0.52 0.51 0.50 0.50

0.00 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Total private beds per pop (1,000) Total public beds per pop (1,000) Source: MOH data based on licensed beds, Daiwa estimates

Hospital admission rate trends Total hospital admissions and private sector hospital admissions averaged 3.2% YoY and 3.9% YoY, Source: Company respectively, over the 2010-12 period. This exceeded the population growth rate, which averaged around We note, however, that the development of Connexion 2.0% YoY over the same period. has been far from smooth. Originally targeted to open in 2010, court arbitration resulting from disagreements - 13 - Health Care / Singapore RFMD SP 3 March 2014

between practitioners has led to significant delays; it  Singapore Healthcare: Coronary angioplasty cost comparison remains unclear whether its management will be able (SGD) to execute the project successfully. 40,000 35,000 Pricing environment 30,000

Based on average total patient bill sizes (for surgical 25,000 specialities), RMG is priced 27% and 17% below its 20,000 main private hospital peers Mount Elizabeth Hospital and Gleneagles Hospital respectively, and only 4% 15,000 above that of public hospital Singapore General 10,000 Hospital. In terms of the cost of selected common 5,000 surgical procedures (coronary angioplasty, treatment of 0 kidney and urinary tract infections, etc.), RMG is also MEH RH NHC* NUH* priced at a discount to its main private hospital peers. Source: MOH Note: *public hospital  Singapore Healthcare: average total bill for surgical specialities (Jan 2012 - Dec 2012)  Singapore Healthcare: Treatment of kidney and urinary tract Average Total Bill RH premium/discount infections cost comparison (SGD) (SGD) Mount Elizabeth Hospital (MEH) 14,138 -27% Gleneagles Hospital (GEH) 12,447 -17% 6,000 Raffles Hospital (RH) 10,284 Singapore General Hospital (SGH)* 9,861 4% 5,000 National University Hospital (NUH)* 8,977 15% Tan Tock Seng Hospital (TTSH)* 8,018 28% 4,000 Mount Alvernia Hospital (MAH) 7,978 29% Parkway East Hospital (PEH) 7,832 31% 3,000 Khoo Teck Puat Hospital (KTPH)* 6,302 63% Thomson Medical Centre (TMC) 6,205 66% 2,000 Changi General Hospital (CGH)* 5,436 89% Alexandra Hospital (AH)* 4,210 144% 1,000

KK Women’s & Children’s Hospital (KKH)* 4,130 149% RH GEH TMC MEH MAH MNH KKH* NUH* SGH* CGH* TTSH* Average 8,140 KTPH* Source: MOH Source: MOH Note: Not normalised for different range of medical specialities across hospitals; Note: *public hospital; only those hospitals with more than 30 cases of the procedure are comparison with Class A (1-bedder) wards for public hospitals shown *denotes public hospital  Singapore Healthcare: daily ward charges for public and The company says it is able to leverage on the synergy private hospitals afforded through its Group Practice Model – which (SGD/day) allows seamless communication between the various 700 specialist centres and the sharing of resources (case 600 notes, etc.). In this manner, it is able to provide holistic 500 treatment at a lower cost overall. We believe RMG has sufficient headroom to raise its prices to meet those of 400 its key competitors. 300 200 100

0 RH AH* PEH FCH TMC GEH MAH MEH KKH* SGH* NUH* CGH* TTSH* KTPH*

Source: AXA Note: *public hospital For public hospitals: Class A1 ward (single-bed) charges used for comparison For private hospitals: single-bed in acute ward charges used

The competition for talent Staff costs represent a significant cost component of RMG’s operating expenses (>60%). The competition for skilled healthcare professionals is a key challenge in the private healthcare sector. RMG’s Group Practice - 14 - Health Care / Singapore RFMD SP 3 March 2014

Model means that doctors are hired as employees of the company. This is opposed to the ‘landlord-tenant’ Financials and forecasts model adopted by its peers, where independent doctors rent space and resources (ancillary services, diagnostic Revenue growth should accelerate from equipment etc.) within the hospital in order to practice. 2016 onwards RMG has established an impressive track record of  Singapore Healthcare: clinical care manpower ratios consistent operational growth, achieving revenue 6.0 5.51 5.17 CAGR of 15.1% over the 2006-12 period. This was 4.81 driven by: 1) the expansion of its clinic base – it added 5.0 4.40 3.98 3.97 4.08 19 new clinics over the 2006-12 period to 83 currently 4.0 (79 in Singapore), and 2) the strong growth of its

3.0 hospital services segment, whose revenue rose at a CAGR of 17.6% over the same period – mainly as the 1.67 1.75 1.82 2.0 1.47 1.51 1.52 1.55 company has progressively expanded its range of 0.68 higher-margin specialist services. 1.0 0.58 0.58 0.59 0.62 0.65 0.57 0.0  RMG: revenue growth trend 2006 2007 2008 2009 2010 2011 2012 (SGDm) Specialists per 1,000 pop. Doctors per 1,000 pop. Nurses per 1,000 pop. 600 30%

Source: MOH 500 25%

RMG believes its Group Practice Model is attractive to 400 20% healthcare professionals as it: 1) removes the risks 300 15% associated with independent practice, and 2) nurtures a team-based environment where research and case 200 10% findings are shared. 100 5%

0 0% The Singapore Government has been proactive in 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E ensuring that there is a sufficient pool of skilled Revenue (LHS) % growth YoY (RHS) healthcare professionals. In 2007, the Duke-NUS Source: Company, Daiwa forecasts Graduate Medical School was established with a cohort of 50 students, along with the expansion of the NUS The company has 3 key segments: 1) healthcare Yong Loo Lin School of Medicine. Most recently, in services (38% of total revenue), 2) hospital services 2013, a third medical school was established through a (61%), and investment holdings (1%). While the tie-up between NTU and London’s Imperial College, revenue growth of RMG’s hospital services segment has accepting its first cohort of 54 students. outpaced that of the healthcare services segment in the past 3 financial years (2010-12), we expect the former As a result of these initiatives, the ratio of doctors per to see a slowdown in growth over the next 2 years 1,000 population increased to 1.82 in 2012 (from 1.47 (2014-15) relative to healthcare services, before in 2006). Similarly, the ratio of nurses per 1,000 accelerating in 2016E (see chart below). population rose to 5.51 in 2012 (from 3.98 in 2006). We see space limitations at the existing hospital Market share premises as the key reason for this. At the same time, According to Frost & Sullivan, the private hospital the company is likely to expand its clinic base in market in Singapore is forecast to grow to SGD1.2bn in preparation for the hospital expansion. This will ensure 2016 at a CAGR of 7.7% over 2011-16. Based on this, we a steady stream of patient referrals for its specialist estimate RMG held around 20% in revenue market services at the expanded hospital in 2016. share as at 2012.

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 RMG: segment revenue growth trends (% YoY) opening of the hospital extension to drive operating (%) leverage from 2016 onwards. 40 35  RMG: margin trends vs. staff costs as a % of revenue 30 (%) 25 26 52.0% 24 20 51.0% 22 15 20 50.0% 10 18 5 16 49.0% 0 14 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 48.0% 12 Healthcare services Hospital services 10 47.0% Source: Company, Daiwa forecasts 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Operating profit margin (LHS) Net profit margin (LHS) We forecast a revenue CAGR of 15.8% over 2013-16, Staff costs as a % of revenue (RHS) driven by strong 2016 revenue growth for the hospital Source: Company, Daiwa forecasts services segment of 30% YoY. We expect the completion of the Raffles Hospital extension as well as Solid balance sheet and cash flow the Taman Warna development to contribute strongly RMG had net cash of SGD261m as at the end of 2013 to the top line from 2016 onward. after receiving SGD120m in cash from the disposal of property at Thong Sia building in 4Q13. Operating margins could face pressure over the medium term  RMG: net cash/(debt) position vs. free cash flow yield Staff costs account for about 63% of RMG’s operating (SGDm) expenses, followed by inventories and consumables 300 15% 250 (14%). As a percentage of revenue, staff costs have 10% increased over the past 3 years, which the company 200 5% attributes to: 1) salary adjustments, and 2) the hiring 150 and training of clinical care staff in anticipation of 100 0% greater staffing requirements once the hospital 50 (5%) extension is completed in 2016. 0 (10%) (50)  RMG: operating-expense breakdown (2013) (100) (15%) Other operating Inventories and 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Operating lease expenses consumables expenses Net cash/(debt) (LHS) FCF yield (RHS) 8% used 3% D&A 14% Source: Company, Daiwa forecasts 3% Purchased and contracted With the two key developments (hospital extension and services 9% Taman Warna) scheduled to begin in 2Q14, RMG will require about SGD430m in funds over a 24-month period. We expect the company to be able to meet the funding requirements comfortably. We forecast an operating cash-flow CAGR of 15.7% over 2013-16, Staff costs driven by the commencement of operations at the 2 key 63% domestic developments by 2H16. Source: Company Dividend policy We forecast staff costs to remain at about 50% of revenue over 2014-16. As a result, we expect margins to While RMG does not have a stated dividend policy, remain under pressure, as RMG will have to hire and management has said it expects to maintain the level of train clinical staff ahead of the proposed hospital dividends paid in 2012 (¢4.5). In 2013, the company extension, to acclimatise them to the company’s team- paid total dividends of ¢5.0. It has paid out about 35% based culture. We forecast a modest 1.1pp decline in of its net profit over the past 5 years. the operating margin over 2013-16, as we expect the

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 RMG: dividend growth vs. payout ratio  RMG: 12-month Bloomberg EPS forecast revisions (¢/share) 0.18 7.0 50% 0.17 6.0 45% 0.16 5.0 40% 4.0 0.15 35% 3.0 0.14 30% 2.0 0.13 1.0 25%

0.0 20% 2-Oct-13 5-Feb-14 6-Mar-13 4-Dec-13 10-Jul-13 31-Jul-13 8-May-13 17-Apr-13 23-Oct-13 19-Jun-13 15-Jan-14 13-Feb-13 27-Mar-13 21-Aug-13 11-Sep-13 13-Nov-13 25-Dec-13 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 29-May-13 DPS (LHS) Payout ratio (RHS) Consensus 2014 EPS Consensus 2015 EPS

Source: Company, Daiwa forecasts Source: Bloomberg

We forecast a dividend-payout ratio of 35% over the 2014-16 period, as we expect the company to focus on Valuation allocating cash flow toward funding the development of its various projects. We initiate coverage of RMG with an Outperform (2) rating and 6-month target price of SGD3.68, which Consensus forecasts offers 13% upside potential from the current level. Our target price is based on a DCF methodology (in which Although RMG’s results have exceeded the Bloomberg- we assume as WACC of 7.4% and a terminal growth consensus forecasts for 7 of the past 8 years, we note rate of 2.5%). The stock is trading currently at a 2014E that there have been cuts to the consensus forecasts for PER of 25.7x, which is more than 1SD above its past-5- operating profit and EPS for 2014 and 2015 over the year mean. Its 2014E PBR of 3.4x is slightly less than past 12 months, possibly because management has 1SD above its past-5-year mean. been too ambitious in its guidance.

 RMG: 12-month forward PER ratio (x)  RMG: 12-month consensus operating-profit forecast revisions 12M forward PER (x) 120 115 26.0 +2 stdev 110 +1 stdev 105 21.0 100 Mean

95 16.0 -1 stdev 90 85 11.0 -2 stdev 80 -13 -13

r-13 6.0 g y p 2-Oct-13 6-Mar-13 5-Feb-14 4-Dec-13 10-Jul-13 31-Jul-13 8-Ma 17-A 23-Oct-13 19-Jun-13 15-Jan-14 13-Feb-13 27-Mar-13 21-Au 11-Sep-13 13-Nov-13 25-Dec-13 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 29-May-13 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Consensus 2014 Op Profit Consensus 2015 Op Profit Source: Bloomberg, Daiwa forecasts Source: Bloomberg  RMG: 12-month forward PBR ratio (x) Our 2014-15 revenue forecasts are 1-2% below those of 12M forward PBR (x) the consensus, while our EPS forecasts are 4-7% lower. 4.5 This is mainly because we expect space constraints at 4.0 +2 stdev 3.5 the existing Raffles Hospital premises to limit the +1 stdev earnings growth of its hospital services segment (which 3.0 Mean currently accounts for about 60% of total revenue), 2.5 until the completion of the hospital extension, due in 2.0 -1 stdev 1.5 2H16. -2 stdev 1.0 0.5 0.0 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg, Daiwa forecasts

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We believe the valuations are reasonable: the stock is October 2011, respectively, at estimated PERs of 33x trading at a 12% discount in terms of PER to the and 37x. average of its peers in the region (a 6% discount excluding IHH). Its closest comparable regional In our view, the current share price does not fully competitors, IHH, KPJ Healthcare, and Bumrungrad capture the significant earnings-growth potential of the Hospital, are trading at respective 2014 PERs of 39.2x, proposed Raffles Hospital extension and Taman Warna 28.8x, and 25.0x, based on consensus forecasts. property. In addition, we believe the prospects for overseas expansion, once more concrete plans relating We also note that RMG is one of the few listed to RMG’s signed agreements in China are announced, companies with exposure to the Singapore healthcare will provide further rerating potential. market, following the privatisation of Thomson Medical and delisting of Parkway Holdings in July and

 Healthcare services providers peer comparison Bloomberg Share price Market cap PER (x) PBR (x) Rev. growth (%) EPS growth (%) Company name code (local curr.) (USD m) 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Regional peers Raffles Medical Group Ltd* RFMD SP 3.22 1,412 25.7 23.2 18.7 3.4 3.1 2.8 13% 12% 23% -19% 11% 24% IHH Healthcare Bhd IHH MK 3.84 9,534 39.2 34.0 27.4 1.7 1.6 1.6 15% 15% 13% 21% 15% 24% KPJ Healthcare Bhd KPJ MK 3.37 1,055 28.8 26.5 21.3 2.8 2.7 2.5 11% 13% 18% 14% 9% 24% Bumrungrad Hospital PCL BH TB 89.00 1,990 25.0 21.7 18.5 6.2 5.6 5.2 10% 13% 15% 13% 15% 17% Bangkok Chain Hospital PCL BCH TB 5.85 448 19.6 16.8 14.6 3.4 3.2 n.a. 10% 8% 18% 12% 17% 15% Bangkok Dusit Medical Services PCL BGH TB 128.00 6,084 28.6 23.8 n.a. 4.3 3.9 n.a. 11% 16% 26% 10% 20% n.m. Fortis Healthcare Ltd FORH IN 93.80 705 n.a. 73.6 32.2 1.0 0.9 1.0 -20% 0% 17% -75% -256% 129% Apollo Hospitals Enterprise Ltd APHS IN 922.45 2,064 37.0 30.7 25.1 4.3 3.9 3.5 16% 20% 19% 9% 21% 23% 29.1 31.3 22.5 3.4 3.1 2.8 8% 12% 19% -2% -19% 37% Global peers LifePoint Hospitals Inc LPNT US 54.25 2,559 20.0 17.3 15.1 1.1 1.0 1.0 10% 6% 6% -4% 16% 15% Community Health Systems Inc CYH US 41.51 4,709 13.3 10.2 8.1 1.1 1.0 0.8 50% 7% 5% 27% 31% 25% Nichii Gakkan Co 9792 JP 921.00 660 21.1 16.0 13.7 1.0 1.0 0.9 2% 3% 3% -13% 32% 16% 18.1 14.5 12.3 1.1 1.0 0.9 21% 5% 4% 3% 26% 19% Other SG healthcare Cordlife Group Ltd CLGL SP 1.18 248 24.0 26.1 21.4 2.6 2.5 2.3 62% 15% 19% 17% -8% 22% Q&M Dental Group Singapore Ltd QNM SP 0.41 194 36.8 31.2 28.9 5.4 5.2 n.a. 25% 11% 11% 10% 18% 8% 30.4 28.6 25.1 4.0 3.8 2.3 44% 13% 15% 13% 5% 15% Source: Bloomberg, *Daiwa forecasts Note: Share prices are as of 28 February

provide downside to our operating-margin Key investment risks assumptions.

We see the following as key investment risks to our Improvement in quality of public healthcare rating and forecasts. infrastructure. Currently, the long waiting times and high bed-utilisation rates at public acute hospitals The main risk to our call would be execution encourage medical tourists, as well as locals who can risks. Execution risks arising from the company’s afford higher-priced healthcare services, to seek inability to expand its existing hospital or complete the treatment at hospitals such as Raffles Hospital. development of the Taman Warna property are a key However, a meaningful improvement in the quality of risk to our medium-term earnings forecasts and view public healthcare services could negatively affect on the stock. demand for RMG’s services, all else being equal.

Increases in staff costs. Under the group practice Regulatory and policy risks. The MOH governs model, staff costs account for about 60% of RMG’s both public and private healthcare providers, as well as operating expenses. In our view, increases in staff costs sets healthcare policies in Singapore. An increase in could be triggered by events such as: 1) a shortage of regulatory-related costs (licensing fees, audit expenses, skilled clinical care staff, 2) salary adjustments stricter compliance requirements) could negatively initiated by the public healthcare sector, and 3) greater affect RMG’s profitability and cash flow. Similarly, competition among private hospital operators, unfavourable healthcare policies (tightening the scope affecting RMG’s ability to retain talent. This could of Medisave usage, increased subvention for public

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hospitals, etc.) could affect the demand for private healthcare services.

New medical breakthroughs and technology. An inability to keep abreast of advances in medical technology or new medical breakthroughs could reduce RMG’s competitiveness and hence the demand for its services. In addition, the need to adopt new medical technology could lead to shorter capex cycles, thereby negatively affecting our free-cash-flow forecasts.

Key management risks. RMG’s founder, Dr. Loo Choon Yong, now aged 64, has been instrumental in the success of the company’s business growth. Inadequate management succession plans or an inability to identify a suitable replacement would represent a downside risk to the share price.

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specialist medical centre. Raffles Hospital was opened in March 2001.

 RMG: Raffles Hospital lobby Appendix I – Company background

Introduction

RMG is a leading private healthcare-services provider based in Singapore. The company operates a chain of clinics as well as a hospital, and offers an integrated range of services across the spectrum of primary, secondary and tertiary care.

RMG also provides other services such as: 1) traditional Chinese medicine (TCM) services, 2) dental care, 3) production and distribution of its own brand of healthcare products in Singapore, Indonesia, Hong Kong and Brunei, including Chinese proprietary Source: Daiwa medicines, and 4) health-insurance products under its Raffles Health Insurance arm.  RMG: store selling Raffles Healthcare branded products

The company’s current operations are based primarily in Singapore. As at the end of 2013, the company operated a total of 79 medical clinics and 1 hospital in Singapore, 3 medical centres in Hong Kong and one medical centre in Shanghai.

Its clinic service provides an important function as part of its integrated healthcare delivery by serving as the first point of contact with prospective patients, who are then referred to RMG’s specialist clinics or hospital for further treatment where required. The company serves more than 6,500 corporate clients, which account for about 67% of its customer base.

Source: Daiwa Company history The company was founded in 1976 by Dr. Loo Choon Raffles Hospital, the flagship of RMG, is a 200-bed Yong and Dr. Alfred Loh, who acquired an existing (licensed for 380 beds) private tertiary hospital located medical practice with two clinics in the central business in the central Bugis district of Singapore. It offers a district of Singapore. The business grew quickly; in wide range of specialist medical and diagnostic services 1982 it opened a flagship clinic in Straits Trading for both inpatients and outpatients. Representing more Building, in the commercial centre of Singapore, to than 30 disciplines, its team of specialists constitutes a serve the corporate community. group practice combining sub-specialty expertise and teamwork. In 1995, it ventured overseas, opening its first clinic in Hong Kong. Meanwhile, the company was listed on the In 2007, RMG acquired the remaining 50% stake in the secondary board in Singapore (then the SESDAQ) in joint venture with CapitaLand for SGD67.5m, by April 1997. In the same year, it entered into a joint issuing 25m new shares to Temasek Holdings and venture with Pidemco Land (currently a subsidiary of Qatar Investment Authority at SGD1.30/share. The CapitaLand) to retrofit Blanco Court into a hospital and hospital received its Joint Commission International

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accreditation (the leading global industry standard) in Loo Choon Yong held 10.2% directly. On a deemed- January 2009. interest basis, Dr. Loo held a further 43% stake.

Currently, about 30% of patients at its hospital are foreigners, who travel from various countries to seek treatment. RMG has set up patient liaison offices in Indonesia, Vietnam, Cambodia, Brunei, Bangladesh, and the Russian Far East, as well as travel agencies throughout the Asia-Pacific region to attract such patients.

 RMG: selected key milestones 2013 Signed agreements to build hospitals in Shenzhen and Shanghai. Announced the sale of Thong Sia building 2012 Insurance arm renamed Raffles Health Insurance from International Medical Insurers 2010 First medical centre opened in Shanghai, China 2007 Acquired remaining 50% of ownership of Raffles Hospital building 2006 Established Raffles Hospital International to provide consultancy services 2005 35% of RMG's patients are foreigners 2003 Raffles Health launched in March to provide healthcare products Surgeons at Raffles Medical complete 2 high-profile separation surgeries - Iranian twins Laleh and Ladan Bijani and Korean twins Ji Hye and Sa Rang 2002 Raffles Hospital officially opened on 16 March 2000 First patient liaison office set up in Jakarta, Indonesia, to cater to demand from foreign patients RMG was listed on the Main Board of the Singapore Exchange on 10 July 1997 Listed on the SESDAQ on 11 April 1995 First overseas clinic opened in Hong Kong in December 1993 First standalone day surgery centre in Southeast Asia established on 18 September 1982 Flagship clinic opened in Straits Trading Building in commercial centre of Singapore to serve the corporate community 1976 Partners Dr. Loo Choon Yong and Dr. Alfred Loh took over Teng's Clinics at Cecil Street and Maxwell House, and operated the practice under the name Drs. Teng & Partners on 1 August Source: Company website

Group practice structure

RMG places heavy emphasis on its group practice model, in which its doctors are hired as employees, working in multi-disciplinary groups, rather than as individual practices renting space within the hospital.

This emulates similar clinical governance models at some of the top medical institutions in the world, such as the Mayo Clinic and Kaiser Permanente in the US.

In this manner, it believes greater synergies can be obtained through the sharing of case notes, research, and best practices, leading to high-quality care and overall cost savings for the patient. At the same time, attrition of its clinical care staff is low as a team-based culture is established.

Shareholding structure and management

As of March 2013, Raffles Medical Holdings Pte (Not listed) held 38.7% of the outstanding shares and Dr.

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 RMG: profiles of selected key management Name Designation Description Senior Management Dr. Loo Choon Yong Executive Chairman, CEO, Co-founder Dr. Loo Choon Yong is the executive chairman of RMG. He co-founded the company in 1976 and was appointed to his current position in 1997, when the company was listed in the Singapore Stock Exchange. Dr. Loo graduated with an MBBS from the University of Singapore and holds a diploma in cardiac medicine from the University of London. He is a member of the College of Family Physicians Singapore. He also read law at the University of London and is a barrister of Middle Temple. Dr. Prem Kumar Nair CCO, General Manager of Raffles Dr. Nair is the chief corporate officer of RMG and the general manager of Raffles Hospital. Prior to this, he held various senior Hospital management positions in the company in areas such as primary care operations, corporate marketing, business development, and talent management. He was with the Ministry of Health before joining RMG in July 1991. Dr Nair is a physician by training and he graduated with a master’s in business administration from Manchester Business School. Dr. Kenneth Wu General Manager of Raffles Medical Dr Wu is the General Manager of Raffles Medical Clinics. He is responsible for the growth and development of the Primary Care Clinics Services for the Group. He also oversees the Group’s interests in Hong Kong. Since joining the Group in 1997, he has progressed through both clinical and operational management positions across the Group garnering experience and expertise for his current role. Dr Wu graduated with a MBBS (Bachelor of Medicine, Bachelor of Surgery) from the National University of Singapore in 1989 and completed clinical postings in the Singapore restructured hospitals prior to joining the Group. In 2007, he graduated with a GDFM (Graduate Diploma Family Medicine) from the National University of Singapore. Clinical Leaders Dr. Alfred Loh Senior Clinical Director, Co-founder Dr. Loh is a consultant physician in family medicine and founding partner of RMG. He is also the senior clinical director of the Raffles Medical Clinics. He was the CEO of the World Organisation of Family Doctors from 2001-12 and is also a clinical examiner in family medicine for the Graduate School of Medical Studies in National University of Singapore. Dr Loh’s qualifications include MBBS (Singapore), FCGP (Singapore), FRACGP (Australia), and FCGP (UK). Professor Walter Tan Medical Director, Raffles Hospital Professor Tan is a consultant surgeon, trained in both general and plastic surgery, at the Raffles Surgery Centre. He is also currently the medical director of Raffles Hospital, a position that he has held since he joined in April 2001. He also holds the position of adjunct professor of surgery at the National University of Singapore. Prior to joining Raffles Hospital, he was professor of surgery and chairman of the Department of Surgery, National University of Singapore. Professor Tan’s qualifications and fellowship degrees include MBBS (NUS), MMed (Surgery), FRCS (Edinburgh), FRCS (Glasgow), FACP (Hon), FRACP (Hon), FACS, FRACS (General Surgery), and FAMS (Plastic Surgery). Dr. Yang Ching Yu Medical Director, Raffles Hospital Dr Yang is a general surgeon and medical director of Raffles Hospital. He is a founding member of the Endoscopic & Laparoscopic Surgeons of Asia, the ASEAN Colorectal Surgeons Association, and the Society of Colorectal Surgeons Singapore. Dr Yang is also a member of the American Society of Colon and Rectal Surgeons. He received his MBBS in 1980 from the University of Singapore. He is a fellow of the Royal College of Surgeons (Glasgow) (1986) and the Academy of Medicine (Singapore) (1992). Dr Yang’s qualifications include MBBS (Singapore), FRCS (Glasgow) and FAMS. Dr. Wilson Wong Medical Director, Raffles Medical Dr Wong is a consultant family physician and medical director of Raffles Medical Clinics. He continues to practise, and acts as the Clinics medical advisor and referee to various companies in areas of healthcare benefits and productivity. He has also served on the boards of the Singapore Human Resource Institute and National Healthcare Group. Dr. Wong continues to be involved in medical training, both at Raffles Medical Group, as well as part of the faculty for the National University of Singapore (NUH) Family Medicine residency trainees. His qualifications include MBBS (Singapore) and MCFP (Singapore). Source: Company, compiled by Daiwa

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 Singapore public healthcare system: 6 regional health system clusters

Appendix II – The Singapore healthcare landscape

An overview

Singapore has developed a low-cost, high-quality healthcare system – the World Health Organisation (WHO) ranks Singapore’s healthcare system sixth Source: MOH globally (based on five indicators measuring the effectiveness of the overall health system), while This structure is an efficient approach, in our view, to Bloomberg ranks the country as having the second treating patients, ensuring that acute hospitals are able most efficient system in the world. to reduce patient load and bed-utilisation rates through timely patient referrals to longer-term healthcare The Singapore Government has played a central part in providers in the cluster. shaping the country’s healthcare industry. In 1983, it  Singapore public healthcare system: regional health system published a National Health Care Plan that: 1) outlined concept plans for the restructuring of the public hospital system to allow greater autonomy and competition among hospitals, and 2) introduced Medisave, a mandatory medical savings account scheme.

Currently, the public healthcare sector is making a transition to a structure comprising 6 regional health clusters. Each cluster is centred around a restructured (acute) hospital, which is supported by a network of primary care providers (clinics that act as the first point of contact with patients), as well as community hospitals and nursing homes (which provider longer- term rehabilitative care).

Source: MOH

Primary care Currently, there are about 2,400 clinics in Singapore; about 80% of primary healthcare services are provided by the private sector (with the remaining 20% covered by public polyclinics). While a large number of private clinics are operated by individual or small groups of physicians, there are 3 main players that operate a chain of clinics: 1) Parkway Shenton (owned by IHH Healthcare) (about 50 clinics), 2) Raffles Medical Clinics (79 clinics), and 3) Healthway Medical Clinics (more than 50 clinics).

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Hospitals residents can then use this savings account to pay for According to the MOH, in 2012, there were a total of approved medical services and hospital fees. about 11,850 hospital beds in the 25 hospitals and specialty centres in Singapore, a ratio of about 2.2 Medishield. Introduced in 1990, this is a low-cost beds/1,000 people. About 85% of these beds are in the government insurance scheme to ensure Singaporeans 15 public hospitals and specialty centres, each with are protected from high hospital fees. The government about 185-2,010 beds. On the other hand, the 10 has expanded the scope of Medishield by allowing private hospitals tend to be smaller, with capacity private insurance providers to tailor the basic plan to ranging from 20-345 beds. people who may want greater coverage at the cost of higher premiums. Medishield premiums (typically  Singapore: list of major hospitals annually) can be paid out of CPF contributions. Public/Restructured