Despite its poor share price performance over the last few years, Raffles Medical Group Ltd (SGX: BSL) remains a key part of my portfolio. Its long-term growth potential in China coupled with its strong core business and relatively low valuation make me believe the healthcare operator will be a great long-term winner.
However, despite my optimism, there are risks to the investment. Here are two that could potentially derail its growth — and what it would take for me to consider selling.
No. 1: Stumbling block in China
With the opening of two new hospitals in China, the middle kingdom could be the next avenue of growth for Raffles Medical. However, expansion into China comes with unique challenges.
If the company is unable to attract patients to its hospitals, the road to profitability may take longer than expected.
With its expansion into China, Raffles Medical will also be exposed to currency and regulatory risk.
No. 2: Cash flow issues
Raffles Medical has spent a sizeable amount of money to open the two hospitals in China. It now has a net debt of S$23 million. The company again burned cash in the second quarter of 2019 in preparation for the opening of its hospital in Shanghai.
Although its balance sheet still remains relatively robust, an unexpected extended period of cash burn may weaken the healthcare operator’s balance sheet.
Scenarios in which I might sell
For now, Raffles Medical remains a key part of my portfolio, and I intend to keep it that way. My investment thesis revolves around its strong core business in Singapore, huge growth potential in China, and a prudent management team. However, this could change in the future.
Alarm bells will ring if growth in China runs into obstacles and the company is unable to turn its China operations profitable over the next five years, On top of that, I will be keeping an eye on the company’s cash burn rate in regards to its operation in China. Currently, the company remains in a robust financial position. But if its balance sheet weakens considerably and it continues to burn cash in China with no end in sight, I may have to reconsider my position.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in Raffles Medical Group Ltd.