Is Raffles Medical Group Ltd Set For Growth In China?

As of yesterday, there are two clear catalysts for growth for hospital and clinic operator Raffles Medical Group Ltd (SGX: R01).

One’s the ongoing expansion of its flagship Raffles Hospital (construction work is set to be done by the first quarter of 2017) in Singapore which would see the hospital’s floor space increase from 300,000 square feet to around 520,000 square feet.

The other is a new 65,000 square feet medical/retail centre that’s currently being built in the Holland Village area of Singapore. The complex is scheduled for completion in the first quarter of 2016 and when it’s up and running, Raffles Medical intends to use 9,000 square feet of space there to provide medical and specialist services. Retail, banking, and food & beverage outlets will populate the rest of the area.

Now, it appears that overseas expansion – in China to be specific – may soon be the next clear driver of business growth for the company.

Yesterday evening, Raffles Medical announced that it has incorporated a new company in China, called Shanghai Qihua Hospital (SQH), in partnership with Shanghai Qihua Investment Co. Ltd. What’s more, Raffles Medical also revealed in the same announcement that it will be pumping in RM188 million (nearly S$40 million) into SQH – whose main business is to develop hospitals – as part of the Chinese outfit’s registered capital.

Raffles Medical has actually been looking at building hospitals in China as early as 2013. But, there hasn’t been anything concrete in that regard since then – yesterday’s announcement of the injection of around S$40 million into SQH by Raffles Medical may perhaps be a sign that things are finally moving in the right direction on that front.

Although a S$40 million investment may seem like chump change to Raffles Medical given the firm’s S$2.3 billion market capitalisation, it’s worth pointing out that the capital outlay is actually a sizeable commitment by the company. As of 31 March 2015, the firm had “just” S$121 million in cash on its balance sheet.

We have to bear in mind as well that Raffles Medical has only spent roughly S$230 million of the total projected amount of S$430 million that it needs to cough up for the new medical/retail centre as well as the expansion of Raffles Hospital. So, it’s not like the company has lots of spare change lying around, so to speak.

A Fool’s take

Raffles Medical currently has a premium valuation. At a price of S$4.00, the firm’s carrying a lofty trailing price-to-earnings (PE) ratio of 33. In comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market benchmark, the Straits Times Index (SGX: ^STI) – has a PE of only 14 at the moment.

With its high valuation, Raffles Medical would very likely need to display some solid earnings growth from this point on in order for its share price to grow materially in the future. And because of that, investors in the company might be happy to know that there’s a chance that the firm’s plans to expand into the healthcare market in China may finally be gaining traction.

The establishment of SQH “is not expected to have any material impact” on Raffles Medical’s business results for 2015. But, it’d still be worthwhile for investors to keep an eye on any future developments in this area for Raffles Medical.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.