- Healthcare services are not subjected to Goods and Services Tax (GST) at the outputnlevel as it is classified as a necessity service. As such, no input tax credit can benclaimed.

- Based on our channel checks, the end-service prices for the private healthcare providers will increase after the implementation of GST (effective 1 April 2015) due to higher cost involved.

- This is because healthcare providers are unable to pass on the tax burden to consumers.

- The fall in corporate income tax rate, on the other hand, from 25% to 24% should help cushion the impact of GST.

- Having said that, we understand that GST can be passed on at the output stage for nonrelated healthcare services such as non-patient accommodation and cosmetic surgery. The list of claimable inputs is yet to be tabled by the government.

- We are neutral on the post-GST upward price revision for the private healthcare sector because of its price-inelastic services.

- We understand that prices for public healthcare are likely to remain the same given its government backing and subsidies allocation. We do not rule out the possibility of patients switching to public healthcare due to pricing reasons.

- Nevertheless, we think the risk of patients switching healthcare preference to be limited due to:- 1) private and public healthcare targeting different set of consumers; and 2) long queues and waiting time at public hospitals.

- In any case, should both the private and public healthcare providers raise end-service prices to mitigate the rising cost, we expect the quantum of price increases to be same.

- KPJ Healthcare (BUY, FV: RM7.90/share – under review) should experience a surge in material cost (currently c.24% of revenue) after GST as its largest revenue driver comes from Malaysia (90%). In comparison, IHH Healthcare’s (HOLD, RM3.80/share) Malaysia operation only constitutes c.15% of revenue.

- All in all, we maintain NEUTRAL on the healthcare sector.

Source: AmeSecurities