Raffles Medical prescribes a patient approach

SLOW and steady was the name of the game when Raffles Medical Group (RMG) set up its hospital on North Bridge Road back in 2001, the year of a global recession.

While the hospital had the capacity for 380 beds, it kicked off with about 150 beds, gradually expanding in batches of about 50 beds. The approach helped Raffles Hospital break even in just two years.

"What we are enjoying now is the fruit of our labour (many) years ago... We are very conservative, maybe because we are doctors mostly," said executive chairman Dr Loo Choon Yong, who co-founded RMG as a two-clinic practice in 1976.

The 69-year-old wouldn't change a thing about RMG's cautious approach; in fact, he is doing it all over again. The same slow-and-steady philosophy now guides RMG's widely-watched expansion in China with its new hospital in Chongqing and an upcoming one in Shanghai.

But does it pay to move slowly in fast-evolving China? "It depends on what you want," Dr Loo remarked. "Do you want to invest in something that grows slowly and steadily? Or do you want to take big risks and jump off a cliff? It would work if you have a parachute, but what if you don't?"

As fears of a slowdown in China and global trade tensions loom, Dr Loo is confident that the cautious China foray will build a robust income stream for the future, even while the bottomline takes a hit in the near term.

Similar to the early years of Raffles Hospital in Singapore, beds in the Chinese hospitals will only be opened up gradually while keeping costs in check, according to Dr Loo.

At the 700-bed Chongqing hospital, which kicked off operations in January, RMG has opened up an initial 150 beds, and only plans to open up more beds in response to demand.

A similar approach will be used for its 400-bed hospital in Shanghai, which is expected to open in the first quarter next year.

Both Chinese hospitals are targeted to break even in three years. Each hospital is expected to incur a loss of S$8 to S$10 million in the first year of operations, followed by a loss of S$4 million to S$5 million in the second year of operations.

To be sure, the start-up costs from Chongqing are biting, albeit within guidance. Earnings fell 13.7 per cent year-on-year to S$13.6 million for the first quarter ended March, although revenue grew 6.7 per cent to S$128.3 million.

Cash flow also appears impacted. Ebitda (earnings before interest, tax, depreciation and amortisation), an imperfect but rough proxy for cash flow, rose 1.6 per cent year-on-year to S$23.6 million in Q1. Excluding the results from Chongqing, Ebitda would have risen 9.3 per cent.

Resilient demand

The bottomline pain is worth the gains, Dr Loo maintained. "We are prepared to take the trouble to start from scratch... Every hospital will have a gestation period, and you must be prepared to take some losses."

And despite recent US-China trade tensions, Goh Ann Nee, chief financial officer of RMG, expects demand to remain resilient "based on the growing middle class" that can serve as domestic medical tourists.

The Chongqing hospital saw about 500 patients in Q1.

When asked about exposure to fluctuations in the Chinese renminbi (RMB), she added that the company has some construction loans and "quite a lot" of its expenses at the hospitals in RMB. This can act as a hedge against booking revenue in RMB.

Even as its expands, RMG is especially cautious about keeping debt in check, Dr Loo said. Borrowings as at end-March stand at S$126 million, against cash of S$110.7 million in the kitty.

Some market watchers have questioned why RMG even needed to expand in China, when its Singapore business holds steady. In Q1, both hospital and healthcare services saw topline growth of 3.2 per cent and 8.9 per cent respectively.

However, there are longer-term headwinds in Singapore. Dr Loo pointed to soft sentiment in medical tourism, which has been an important source of patients here. Thailand and Malaysia are strong competitors.

"It's really the high cost of treatment in Singapore, plus the strong Singapore dollar. These are all factors that make it quite prohibitive for some of these visitors," he explained. Expanding abroad then becomes crucial for growth in the long haul.

When asked if acquiring an existing hospital in China may have been cheaper than going greenfield, Dr Loo replied that an acquisition in China would be tough, given that most players there are government hospitals. Meanwhile, a greenfield operation ensures RMG "will get all the goodness that flows" from the hospital with control over its destiny.

Still, Dr Loo knows that it may be a tough sell. Since RMG announced its expansion plans in mid-2016, its shares have fallen over 30 per cent to S$1.03 as at May 10, while the benchmark Straits Times Index rose 17 per cent. RMG traded at a peak 41.2 times earnings in 2015, but now trades at 26.8 times earnings.

Could Malaysia have been a more palatable option for expansion? After all, fellow hospital operator HMI has enjoyed strong medical tourism inflows at its facility in Malacca.

To that, Dr Loo said: "Yes, we did look at Malaysia several times. But each time, the events are such that it did not work out... If we want to invest, Malaysia is more convenient, but it's well-served, and how many hospitals can you have in Malaysia?

"Maybe one in Kuala Lumpur, one in Penang and one in Johor, that's it. If you go to a country like China, if you haven't gotten into trouble, you can have 50 hospitals."

The question of a successor

But that said, RMG has its hands full with the two hospitals in China for now, and is looking to manage them well before deciding whether to build more, Dr Loo added.

When pressed if RMG may build more hospitals in China in the long haul, Dr Loo said: "Well, let's put it this way: If we can actually do a good job and get our returns as appropriate, then it would be silly to stop at two... We know the risks, so if we can survive, we would want to do more."

Beyond fundamentals, another issue that could surface in the mid to long term is who will succeed Dr Loo at the helm, and how that individual will carry on the China strategy.

"We don't have a successor yet but we have many good people helping and working in different parts of the company, heading different things. These are people who can step up when the vacancy arises to take more responsibility... so that I can retire," Dr Loo said.

When asked when he plans to retire, he replied: "When I've got strong people here who can take (RMG) to the next stage... This type of thing, a timeline is artificial. I can retire as CEO but still be on the board."

Ultimately, part of Dr Loo's pitch to retail investors is to look back at RMG's track record as a fundamentals-driven company with a 22-year listed history. "Some people list to cash out. When I listed, I told myself this is the beginning of my work."

And while the China expansion has added a dose of anxiety, Dr Loo urges investors to stay the course and wait for fruition. "We always think of the long term. That's why we must today plant fruit trees for tomorrow. Then we will have durians and mangoes to eat," he notes with a chuckle.