Financial Valuation

1. Background on Raffles Medical Group

Raffles Medical Group began with two clinics in the CBD in 1976 and has grown into the integrated healthcare organisation today. Raffles Medical Group has breadth, depth and size, as reflected in the 470-fold growth in turnover and 600-fold increase in profits over the past 30 years.

The Group continues to actively seek opportunities in the region and will consider growth through acquisition or green field projects. They continue to upgrade their existing Jakarta office into a medical centre and will provide the Indonesian patients more convenient access to their brand of healthcare.

2. Raffles Medical Group's Business Segments

Historically, Raffles Medical Group comprised 2 main business segments namely, Healthcare Services and Diagnostics Services.

Healthcare: The operations of medical clinics and other general and specialised medical services and the operation of hospital.

Diagnostics: The business of medical laboratory and imaging centre.

However, with effect from 2003, Raffles Medical Group segmented revenue into Healthcare Services and Hospital Services instead.

Healthcare: The operations of medical clinics and other general medical services; trading in pharmaceutical and nutraceutical products and diagnostic equipment; and provision of management and consultancy services.

Hospital: The provision of specialised medical services and operations of hospital and business of medical laboratory imaging centre.

The rationale behind the revision of segmentation of business is due to the rising importance of hospital services in which rapid growth stems from growing demand of medical services from the growing ageing population and the phenomenon of medical tourism.

3. Revenue Growth Drivers

3.1 Singapore Economic Growth

Based in Singapore, Raffles Medical Group derives 70% of the revenue from local patients. As such, Singapore's economic conditions and future economic outlook is expected to continue to be a key determinant of the growth of Raffles Medical Group's businesses. Researcher's estimate of Singapore's future GDP growth ranges from 4.5% to 6.5% in the future.

3.2 Demographics: Ageing Population Growth

Ageing population is an important revenue driver for the healthcare industry. In Singapore, baby boomers were born between 1947 and 1965 and the fertility rate in those years averaged at 3.4% and life expectancy at birth in Singapore was 79.6 years in 2005. As such, the growth of ageing population will be aggregated at 3.4% currently and the growth is expected to sustain for a conservative estimate of 19.6 years (will be rounded down to 19 years to be used in the valuation model) due to assumption of convergence to stable growth rate when the contribution to growth due to the baby boomers declines.

3.3 Medical Tourism Growth

Medical tourism has risen to become a prominent phenomenon in the healthcare industry. The high growth rate of this emerging industry is accompanied by an incentives program of the Singapore Government which in turn boosts the overall growth in this industry. Singapore is targeting to attract one million foreign patients annually and expects to extract 1.8 billion of revenue from medical tourism by 2012 from 450 million in 2003. This equals an average growth rate of around approximately 17% over the coming years. By contrast, the estimations by the Hospital Segment of the Raffles Medical Group were more conservative where an increase in foreign patients of around 5.2% per year until 2012 is expected (increase of foreign patients from 200000 to 300000). Thus, on the average, medical tourism will grow at 11% (average of 17% and 5% projections) and this value will be taken to be the expected scenario. This increase is mainly due to medical tourists from Indonesia (45%), Malaysia (20%) and other ASEAN countries (Appendix ?).

3.4 Geographical Business Expansion

Another revenue growth driver is due to the geographical expansion planned by the Raffles Medical Group. The Group strives to continue setting up more representative offices and appoint more associates overseas to serve its international clients. Business development activities (including intensive marketing initiatives) are already in full swing exploring opportunities in regional hospitals and medical centres in key cities within China.

Raffles Medical Group has also established representative offices in Indonesia and Dhaka, and a network of clinics in Hong Kong.

Taking into account of the geographical ventures, Raffles Medical's future growth is dependent on the nominal long-term GDP growth of Indonesia (4.5% - 6.5%), Malaysia (4.5% - 6.5%) and China (11.6%)(source). The Asian Development Bank also forecasted a growth in GDP for South East Asia of 5.6%. Thus, 5.5% for long-term GDP growth for Indonesia and Malaysia is taken as the expected scenario.

In giving GDP growth of Indonesia and Malaysia a weightage of 75% and that of China a weightage of 25% we derive an average growth rate of 7.03% for the geographical expansion of both segments of the Raffles Medical Group. (calculations see appendix).

The reason for attaching a higher weightage to the GDP growth of Indonesia and Malaysia is because out of the total revenue from overseas, 45% is made up by Indonesia, 30% by Malaysia due to existing offices and medical centres in these countries. A 25% weightage is given to China due to a strong possibility of it being a venture spot and at the same time has no existing medical centres in China yet.

4. Weights of Revenue Drivers in Individual Segments

4.1 Hospital Services Segment

Hospital Services Segment (extra-ordinary growth over 6 years)

Weightage: 33.33% 36.67% 30%

Driver: Medical Tourism Singapore Aging Population Geographical