Nine New Reasons To Increase PCR Swab Testing
RFMD has been a beneficiary of the ongoing COVID-19 situation in Singapore. Inpatient volumes have already exceeded pre-COVID-19 levels due to high domestic patient load. With nine new VTLs, RFMD stands to benefit from its exclusive contract with Changi Airport Group for on-arrival PCR testing. Operations in China are ramping up and are expected to break even in the coming years. Maintain BUY with a slightly higher target price of S$1.66 (previously: S$1.43).
• PCR swab testing demand to continue. With the increasing number of COVID-19 cases in Singapore, demand for PCR swab testing is set to stay. Raffles Medical Group’s (RFMD) overall PCR swab testing volumes have increased but margins have started to soften due to the introduction and rising adoption of Antigen Rapid Tests (ART). However, PCR swab test is still considered the gold standard for determining infection and is still required for patients with respiratory symptoms, helping to sustain demand as COVID-19 cases surge in Singapore.
• Unfazed by any increase in testing volumes. Singapore’s government has recently announced the opening up of nine additional vaccinated travel lanes (VTL), allowing quarantine-free travel to countries such as the United Kingdom and the United States. RFMD, having an exclusive contract to perform PCR testing on all inbound passengers, is set to benefit from a surge in demand for PCR testing. Management has noted that the group has the available capacity to take on the expected additional testing volume from the VTLs, given space to host the testing facilities. However, the government has also removed the need for PCR routine testing on the 3rd and 7th day post-arrival. Management has noted that VTL passengers leaving Singapore after their stay tend to return to RFMD for their pre-departure PCR test. This provides some customer stickiness and additional PCR swab testing revenue moving forward.
• Chinese hospitals set for inflection point in 2024. RFMD’s China hospitals are on track to exit their gestation periods as operations start to ramp up. Raffles Hospital Chongqing currently has an operating capacity of 200 beds while Raffles Hospital Shanghai’s is at 150 beds. As guided by management, Chongqing would be EBITDA loss making for 2021 before breaking even for 2022 while Shanghai is expected to only break even in 2024, having recently opened on Jul 21. Management noted that the expat population has returned to some extent (though still below pre-COVID-19 levels), which could aid patient load at the hospital. We are more positive on the Shanghai hospital’s prospects, given the potential for higher billing intensity.