Raffles medical AGM 2018

Highlights I have gleaned from Raffles Medical AGM

1) Revenue stream
56%Hospital
40% healthcare
4% investment holdings, 

There is a sharp increase in investment holdings revenue due to Raffles Holland V rental business / contribution (Similar to REIT business) . Raffles Medical is focused on acquiring space for land intensive hospital business and is converting space to acquire rental.

 

Prevailing trends and strategy
2) In 2017, due to the economic downturn, there is significant price cutting / negotiation in corporate services. Companies are lowering their quotes for insurance and clinic contracts.

As Raffles medical is focused on bottom line profitability and not top line sales revenue, they are turning down contracts that have low profit margin to reduce unnecessary expenditures. 

3) There is strong price competition from Malaysia and Thailand. This is worsened by high medical charges in Singapore. This led to industry wide decrease in foreign patients and stagnant patient growth.

4) Raffles medical is able to pass on expenses to patient but also trying to maintain affordable health care services (compared to parkway) . The main contributions to expenses are rental and manpower expenditure (skilled doctors and nurses) 

According to the chairman, revenue and profit maximising is not the main gauge of the doctors KPI unlike higher priced competitors like parkway.  

Higher medical expenditure to be expected throughout the industry which is inbuilt inside the business model. Raffles medical pricing strategy is to be less costly than private tertiary hospitals.

5) Disclosure of business groups

GP clinic business
Low profit margin
Management is monitoring and closing of under performing clinics and opening potential  ones.

Hospital business
Higher profit margin
Dependent on foreign patients as there is strong competition in the public healthcare sector.

Rental business
Highest profit margin out of its various segment. 

However, management confirmed they will not be focusing on this line  of business, but remain focuses on its core medical care and treatment business.

6) Technology
Marketing online and referrals from other doctors to reduce unnecessary expenditures.
Provision of medical supplements and medical concierge services via online platforms.Working on online retailing to manage expenses

Utilisation of technology to reduce unnecessary manual processes.
Elimination of physical paper medical platforms.

Collaboration with Fin-tech groups to explore ways to incorporate technology into its businesses. The focus is on improving efficiency and not trying to create some breakthrough technology.

7) Risks
There is potential overcapacity from Raffles extension due to slowdown in patients from medical tourism. Management is aware of this and is focused on prudent approach to monitor overcapacity issues. They are increasing beds in hospitals and focused on better utilisation of space to pursue organic growth rather than inorganic growth via acquisitions.

Highly dependent on demand side economics.

Increased manpower expenses in line with inflation. 

Importance of monitoring increase in Capex (estimated to be 100 plus million). The investor has to analyse and determine whether is it a worthwhile business to hold for the long term. 

No issues with internal funding from operating cash flow, will be borrowing in foreign currency CNY to hedge forex risk

Strong retention rate. Staff are motivated and well compensated to prevent poaching. Attrition rate <3% 

Doctors have professional insurance to indemnify the hospital. Costs contained at doctors. 

8) China business model
People go to hospitals rather than clinics for acute illnesses.  They tend to frequent hospitals rather than GP clinics. For chronic diseases, patients frequent clinics and GP.

As such, hospitals in China will be focusing on specialist high end care, surgery and inpatient needs. Its practises and processes are much more efficient than china's government and international hospitals. 

The business is highly dependent on branding. There is high demand at China end and untapped markets to expand into. 

Management Estimates
Chongqing Ebitda Break even in third year
Shanghai Ebitda break even 3rd year
Both hospitals might be loss making until they break even in approximately the third year. The risks are still not yet fully defined. Management is practising prudent scaling up and risk management. They are more focused on building their base up firmly before any large actions expansion or acquisitions.

 

Chongqing 1 belt 1 road will attract china medical treatment seekers. Due to interconnectedness of China's districts, those patients will be from the regional area and not isolated to Shanghai and Chongqing area. The potential and actual estimated sales will be unclear and it is too murky at the on-start to make any reasonable accurate assumptions.

A lot of the shareholders had investment experience in China or have worked there before. A significant number had expressed concern over China financial reporting issues.  Management indicate they will send their financial staff to monitor and prevent possible reporting mischief. 

Commercial insurance is mainly controlled by large players which balance sheets are opaque and largely off balance sheet. It will most likely be focusing only on the hospital business for now before venturing to other areas.

9) Moat of the business.
Have a doctor to hold your hand when facing uncertainty and potential tectonic shifts to your personal life. 

Importance of having regular doctors, and human touch when seeking medical treatment. This is one aspect that cannot be easily replaced by technology. The hospital and GP business is not just a medical treatment business,  but also a relationship building business.

Medical and hospitalisation is a regulated industry that is resistant to entrants. Not anyone can simply set up a hospital and employ unlicensed doctors. It should have a more durable moat compared to other types of businesses.

10) Potential Technology disruption
E-commerce to sell Medicine,supplements and checkups.

Focus on technology to decrease costs.

Electronic notes and easier maintainence.

Working with startup for solutions. Not spending money on necessary technology and acquisitions.


Personal (and potentially biased) opinions of this author

1) In my opinion, there are still too many undefined risks and possible outcomes regarding the expansion into China and the financial viability of the business there. There should be no reason to average up / down as of now until the hospitals start to show results. Any further action now is a speculative bet rather than a sound fundamental improvement of the business. Nonetheless, there might be further upward / downward correction in share price

2) I have heard of china financial reporting issues back from the S chips era and also from a professor's blog that I sometimes read.
http://www.baldingsworld.com/

Criticising economic data is not within my circle of competence and I have no strong opinion about it. Nonetheless, I have not directly invested in China equities as I find their financial reporting methodology unclear and vague (Some China exclusive hybrid methodology of GAAP and IFRS). 

Nonetheless, the fellow shareholders at the AGM have been very vocal and outspoken about the business culture and poor financial disclosure methods in China and specifically requested management to situate a honest and trustworthy team to remain oversight there. It is indeed alarming and more prevalent than I thought and I should pay attention to its potential spillover impacts on my portfolio.

3) There might be potential of a real estate speculation bubble in China. Management gave an anecdote that there were attempts to buyout the land under Raffles Medical Shanghai and Chongqing at a higher price (then acquired) even before the hospitals were being built. 

It might be evidence that management have gotten a really good deal in their choice of prime estate location, or there are fervent speculators playing with the real estate market. I should be wary of china based businesses (especially those with high indebtedness) as it has the shadow of the 2008 Global Financial Crisis.

4) RM is not just about Raffles medical, but also about Relationship management. If the service is good and the price point is affordable, the patients will still choose to frequent back this place. 

I have never thought of the medical industry in this perspective before and I am not sure whether this is a real moat or management fluff. Nonetheless, it is an interesting point to consider in my future analysis.