Government committed to expanding public healthcare capacity. For 2009 Budget, S$4b will be spent on healthcare infrastructure, including new public hospitals. More hospital beds will be created over the next five years, alleviating concerns about overcrowding in public hospitals.

Headwinds from falling foreign patient volume. Raffles Medical's (RFMD) foreign patients come from more than 100 countries. With the global economic slowdown, the number of foreign patients coming from outside ASEAN will decline. Raffles Hospital's foreign patient volume could drop 15% in 2009, resulting in a 3.2% yoy decline in revenue.

Private sector's patient load to be hurt by economic slowdown. During both the Asian financial crisis and the bursting aftermath of the dot-com bubble, the growth in demand for private healthcare services as measured by inpatient discharges declined 6.4% and 8.7% respectively. We are projecting Raffles Hospital's domestic patient volume to drop by 7.5% in 2009. Overall, 2009 revenue could decline 9.7% yoy to S$183.9m.

About 70% of staff costs are fixed. Staff costs will thus be less flexible on the downside given the need to maintain operating efficiencies in medical specialties and clinics despite the economic slowdown. Overall, we expect 2009 staff costs to decline 5.5% to S$95.9m.

Maintain SELL; fair price: S$0.59. RFMD is trading at 2009 PE of 14.6x compared with the market PE of 10.4x. Such a premium is not justified as the sector is facing increasing earnings risks attributable to the global economic slowdown. Our fair price of S$0.59 is based on the discounted cash flow model, assuming WACC of 8.0% and terminal growth rate of 0.5%.