Investment Highlights

• We remain NEUTRAL on the private healthcare sector for FY19. The growth prospects for the sector globally are positive over the long term, underpinned by an aging population, rising affluence and increasing life expectancy. The local private healthcare sector has an added catalyst, i.e. medical tourism backed by its highly competitive charges and hospitalisation costs (vs. those in developed countries), a generally English-speaking population as well as various incentives provided by the government.
• Private healthcare operators in Malaysia are poised for a major step-up in revenues and profits from the governmentbacked national health insurance system. However, there are no full details yet. We believe the scheme will force private healthcare operators to drive down their prices, but the resulting volume will support them to achieve economies of scale with a slight margin compression. We expect KPJ Healthcare to be the prime beneficiary as the group has presence in almost every state in Malaysia (see Exhibit 1).
• Our house projection for the USD/MYR rate is 4.12. Private healthcare operators in Malaysia may be negatively impacted by the weakening MYR vs. the USD as costs of key inputs such as drugs, medical supplies and medical equipment are denominated in USD. On the other hand, a cheaper MYR might boost Malaysia’s medical tourism volume. Malaysia’s medical tourists contribute close to 5% of IHH and KPJ’s revenue.

• We may upgrade our NEUTRAL call for the sector to OVERWEIGHT should there be: (1) a surge in patients due to outbreaks of pandemic diseases; (2) lower-than-expected start-up losses at new hospitals; (3) value-accretive M&As; and (4) a jump in medical tourists. In contrast, we may downgrade to UNDERWEIGHT should there be: (1) a significant dropout of patients from private hospitals due to economic reasons; (2) higher-than-expected and prolonged start-up losses from new hospitals.

• We believe the current rich valuations have reflected the fundamentals of IHH Healthcare (HOLD, FV: RM5.30) and KPJ Healthcare (HOLD, FV: RM1.15).

Source: AmInvest Research - 27 Dec 2018