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Nikkei Markets

Raffles Medical's future hinges on China hospitals

Singapore prospects limited by rising competition from neighboring countries

Raffles Medical Group derives most of its revenue from Singapore, where it operates a 300-bed hospital as well as a large network of clinics and laboratories.   © AP

SINGAPORE (Nikkei Markets) -- After struggling to grow earnings over the past four years, private healthcare provider Raffles Medical Group is nearing a crossroad as its first hospitals in China prepare to open in the next few months.

The Singapore company sees the China ventures as growth drivers, offsetting the muted prospects in the healthcare market at home. However, some observers warn that the China expansion is not without risk and could further drain the company's profits.

The first hospital, a 700-bed facility in the western Chinese city of Chongqing, is scheduled to start operations by year end with an initial 100 to 200 beds. The second, a 400-bed hospital in Shanghai, will open in the second half of 2019.

The two facilities are aimed at giving Raffles Medical a foothold in the fast-growing Chinese healthcare market, where total spending is expected to grow by 11.4% per annum to $1.26 trillion in 2022, according to Fitch Solutions. This is in contrast to Singapore, where private hospitals are losing out to lower-cost competitors in Thailand and Malaysia in the competition for medical tourists.

The China hospitals mark the start of a major transformation of Raffles Medical from Singapore's second-largest private sector healthcare provider to a regional player.

Raffles Medical currently derives most of its revenue from Singapore, where it operates a 300-bed hospital as well as a large network of clinics and laboratories. So far, its overseas ventures have been limited to clinics in China, Japan, Vietnam and Cambodia.

In a recent report, Daiwa Capital Markets projects that Raffles Medical's annual revenue could grow from 492 million Singapore dollars ($357 million) in 2018 to S$1.41 billion in 2025, with China accounting for 48% of the total.

Most analysts expect Raffles Medical's two China hospitals to break even in their third year of operations, in line with the company's own guidance. The advantages enjoyed by Raffles Medical include its strong brand name and ability to fund the China expansion without resorting to debt financing.

Others, however, warn that opening a hospital in China is a complex process and that there is competition from other Chinese and international players entering the market. For example, a Xinhua report last year said that the number of private hospitals in China doubled to 16,900 between 2011 and April 2017.

According to estimates compiled by Refinitiv, net profit for Raffles Medical is expected to fall to around S$59 million in 2019 from around S$65 million this year and S$70.8 million in 2017 due to start-up costs in China. Profits have barely grown since hitting S$67.6 million in 2014 due to the flagging number of foreign patients in Singapore.

Kemp Dolliver, chief investment officer at U.S.-based Cherrystone Hill Capital Management, said that while most operators work on the assumption that a new hospital can achieve an operating profit by the third year, the outcomes can vary widely due to location, ability to work with local regulators and brand name.

In the case of Raffles Medical, the company does not have a clinic in Chongqing and probably lacks brand recognition in the western Chinese province, making the rollout a lot more challenging. In contrast, the upcoming Shanghai facility will be the only hospital in the vicinity and could benefit from Raffles Medical's existing clinic in the city as well as the large expatriate community.

"One truism for hospitals is the importance of the catchment area... Expats may travel further but locals will go to the nearest facility," he said.

Samir Dixit, managing director for the Asia Pacific at BrandFinance, a consultancy, added that a brand that is well known in Singapore and Southeast Asia might not have the same appeal in China.

A clinic operator such as Raffles Medical can draw well-heeled expatriates in China but hospitals are more dependent on locals because of their scale, he said. A BrandFinance study in China two years ago found Raffles Medical ranked fifth out of 10 local and foreign brands.

Raffles Medical is not the only Singapore healthcare player with large ambitions in China.

Bigger rival IHH Healthcare, which is listed both in Singapore and Malaysia, plans to open three hospitals in China within the next three years, while Thomson Medical has announced plans for two in-vitro fertilization centers.

Perennial Real Estate is also getting into the act by developing hospitals and other healthcare facilities in partnership with local Chinese players with a strong operating track record.

--Kevin Lim

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