Why Raffles Medical might be biting off more than it can chew

Its plans to expand in China spell further cost pressures.

Raffles Medical Group's recent announcement about developing a 700-bed hospital in Chongqing might be a case of biting off more than it can chew, said a report by CIMB.

According to the brokerage firm, the plan to develop a hospital in Chongqing is a strong signal of the group’s ambitions to build a presence in China. To recall, it also announced in 2015 that it would be building a hospital in Shanghai. There are also talks regarding developing a 200-bed facility in Shenzhen.

CIMB said the group is in a heavy expansionary base, and even as its margins have been declining over the past three years, it was only because of gestation costs from smaller projects such as the ones in Shaw Centre, ISOS, and Holland V.

However, cost impact from its larger investments has yet to be seen. CIMB believes margin pressures will further intensify over this year.

"To get a sense of the magnitude of costs, we start by drawing parallels to start-up costs incurred by other new hospitals (Mount E Novena and Gleneagles HK). Overall, our analysis shows that RFMD’s Chongqing hospital could drag down FY17-18F EBITDA by 5-30%," said CIMB.