• Healthcare sector's future prospects will continue to be influenced by several key factors: (i) growing demand for elective surgeries, (ii) recovery in occupancy rates and patient numbers as we transition to endemic phase, (iii) an increase in health insurance ownership, and (iv) rising trend of health tourism.

• Expect flattish margins for pharmaceutical players on the back of inflationary pressure.

• We maintain our positive outlook on the Healthcare sector, with an Overweight rating and a BUY call on IHH (TP: RM7.18) and KPJ (TP: RM1.36).

Hospital activities to gain momentum. Moving ahead, growth for healthcare providers will be driven by two main factors namely (i) an increasing trend of inpatient admissions and (ii) higher beds occupancy rate (BOR). Furthermore, earnings of these players will continue to be supported by a rise in demand for elective surgeries. On top of that we remain bullish on revenue contribution from health tourism segment supported by Malaysia Healthcare Travel Blueprint 2021-2025 which serves as a strong foundation for the sector's recovery. The blueprint aims to exceed the RM1.7bn target in healthcare travel revenue, further boosting the prospects of the healthcare sector.

API prices moderate but margins among pharmaceutical players are expected to be flattish due to global inflationary pressure. Looking at active pharmaceutical ingredient (API) prices, it is worth to note that API prices have stabilized. According to the India-based IIFL Securities, API/ Key Starting Materials (KSM) pricing Index, API prices has shown a decline by 2-8% over the past 3 quarters mainly due to the normalisation in supply chain. Note that India is the third-largest pharmaceutical market in the world, importing 70% of its requirement of API from China. In-line with the reopening of China’s border, we opine the API prices will continue to stabilize and revert back to pre-pandemic level. On top of that, we foresee resilient demand for pharmaceutical products thanks to increasing awareness on the importance of healthcare, post-pandemic. However, we remain concern on pharmaceutical player under our coverage, Apex Healthcare (HOLD, RM3.01). We believe that the group's margins might be impacted by global inflationary pressures, resulting in potential moderation. Note that the group has completed its bonus issue recently and hence, a reduction in price to RM3.01 from RM4.57. As mentioned in our initiation report, we believe the 1:2 bonus issue for existing shares will enhance the stocks liquidity, making it more attractive.

Maintain OVERWEIGHT. We maintain OVERWEIGHT call on the Healthcare Sector with a BUY call on IHH (RM7.18) and KPJ (RM1.36), driven by several factors. Firstly, we anticipate an upsurge in demand for elective surgeries. Secondly, as we transition to endemic phase, we expect a recovery in occupancy rates and an increase in the number of patients. Thirdly, higher health insurance ownership and growing Malaysians’ populations. Fourthly, a growing trend of health tourists. Downside risks for our sector call include (i) currency volatility that could affect medical tourism (ii) persistent shortage of nurses and (iii) unfavorable regulatory changes could also impact the healthcare industry in Malaysia, which is subject to strict regulations.

Source: BIMB Securities Research - 13 Jul 2023