Investment Highlights

• We are NEUTRAL on the private healthcare sector in 2018. The growth prospects for the sector globally over the long term are positive 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 medical charges and hospitalisation costs (vs. those in developed countries), a generally English-speaking population as well as various incentives provided by the government.

• Over the short term, private healthcare operators in Malaysia will also benefit from the strengthening ringgit vs. USD, as costs of key inputs such as drugs, medical supplies and medical equipment are denominated in USD. On the other hand, as in the case of 2017, private healthcare operators in Malaysia will continue to face wage inflation in 2018, and some short-term pain for long-term gain, i.e. start-up losses from new hospitals.

• Private healthcare operators in Malaysia are poised for a major step-up in revenues and profits if a government-backed national health insurance system becomes a reality in Malaysia. There are concerns that the current public healthcare system in Malaysia is untenable over the long term. The funding needs for the sector are on a constant upward trajectory simply due to the growing population, aging population, a longer life expectancy and cost inflation. Already, overcrowding has become a common sight in public hospitals, while patients seeking specialist treatments will have to bear with a long waiting period.

• Under a national health insurance system, theoretically, citizens can choose between seeking treatments in a public or private hospital. While a patient seeking treatment in a private hospital will still incur a higher cost (in terms of a higher contribution for a premium national health insurance package, or out-of-pockets for extra services provided by the private hospital not covered by the health insurance) vs. a public hospital, the general price differential between the two hospitals should narrow. There is a possibility that private hospitals may even drop prices for certain services (for instance, an MRI scan) due to better utilisation of their equipment, with more patients switching to private hospitals from public hospitals.

• However, the biggest hurdles for a national health insurance system remain who will be contributing, by how much and the legitimacy of free riders in the system.

• 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 national health insurance system materialises in Malaysia. 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-thanexpected and prolonged start-up losses from new hospitals.

• We believe the current rich valuations have reflected the fundamentals of IHH Healthcare (HOLD, FV: RM6.33) and KPJ Healthcare (HOLD, FV: RM1.13).

Source: AmInvest Research - 28 Dec 2017