Raffles Medical looks to cash in on China’s healthcare boom

Raffles Medical Group is looking to bounce by breaking into China this year. The Singapore-based health care provider, which operates dozens of medical clinics and laboratories as well as the Raffles Hospital, encountered a slight growth hiccup but it hopes to re-ignite its growth engine through an aggressive China expansion strategy. RFMD announced its collaboration with Shanghai Lujiazui to build a 300-bed hospital in Pudong, the bustling financial district in Shanghai, teeming with wealthy expats and a local population of more than 5 million. Raffles Medical has also agreed to work with China Merchant Group for a similar 200-bed hospital venture in Shenzhen, one of the country’s most successful Special Economic Zones situated just north of Hong Kong. Management is even considering building hospitals in the capital Beijing.

Maybank Kim Eng analyst James Koh says Raffles Medical has adopted an “overall strategy of targeting ‘gateway’ cities in China.” “The company continues to position itself for overseas expansion to complement its organic growth plans in Singapore. Based on latest discussions with management, we expect to see concrete positive news flow by year-end,” he adds.

Raffles Medical has seen double-digit growth in recent years by successfully riding on the booming private hospital trend in Singapore, but it could expand even faster if it manages to nab a slice of China’s lucrative private healthcare market. Government and Maybank Kim Eng research data show that private healthcare expenditure in China is rising rapidly, doubling to RMB 1 trillion in 2011 in just six years.

The fast increase in private healthcare spending can be attributed to China’s greying population. As of 2011, 9.1% of the country or 123 million Chinese is aged 65 and above and require more intensive healthcare services – or 50 million more elderly Chinese than in 1995.

More are expected to join China’s old age cohort as life expectancy in China has increased by roughly 6 years in just two decades, from 68.6 years old in 1990 to 74.8 years old in 2010. Maybank Kim Eng’s Koh is confident that Raffles Medical will be able to fund its expansion projects because of its healthy net cash position, strong organic cash flow, and ability to secure 50% project financing for China projects.

Given its strong growth prospects locally and overseas, RFMD is currently a great pick for investors, according to CIMB analyst Gary Ng. Chinese hospital ventures will likely be confirmed in the next three months, and will subsequently boost stock prices, he says. Even if the projects fall through, Ng expects shareholders to receive more cash in the form of larger dividends.