• Healthcare sector’s promising outlook is well supported by several key drivers, namely: (i) increasing discerning patients, (ii) greater affordability with accessible credit facilities like credit cards and medical insurance, (iii) rising demand for elective surgeries, (iv) organic sector growth, (v) the digitalization of healthcare services, (vi) a growing trend in health tourism, and (vii) an aging population.

• Maintain optimistic outlook on healthcare sector, with an OVERWEIGHT rating. IHH (BUY, TP: RM7.17) is our Top Pick.

Upbeat hospital activities. Reflecting on the impressive earnings performance of private hospital players in the current quarter, it is evident that the healthcare sector is thriving and continues to record growth. According to MarketLine, in 2023, the Malaysian healthcare players generated revenues amounting to USD14.5bn, reflecting a 6-year CAGR of 3.3% from 2018 to 2023. Inpatient care and outpatient services were the largest segments of the Malaysian healthcare sector, accounting for 29.2% and 28.5% share in 2023, respectively. We believe the number of inpatients will continue to increase, driven by aging population, which suggests a rise in the prevalence of non-communicable diseases (NCDs) and a corresponding demand for elective surgeries. However, as for pharmaceutical segment, our concern centres on the possibility of elevating costs that might erode pharmaceutical players' margins. Malaysia heavily relies on imported pharmaceuticals, with annual imports value exceeding RM10bn. Malaysian drug producers primarily focus on generic and over-the-counter (OTC) medicines, which possess limited capabilities for innovation compared to regional giants like China and India. This reliance on external sources leaves us vulnerable to global price fluctuations.

Maximizing earnings through digital healthcare integration. Another catalyst is the increasing integration of digital healthcare platforms and devices. As reported by Healthcare Dive, a prominent American online publication specializing in healthcare news, the broader implementation of AI in healthcare could lead to annual industry savings ranging from USD200bn to USD360bn. These savings would result from error reduction, improved efficiency and better resource management. Generative AI will play a crucial role in assessing patient risk factors and predicting potential surgical complications. Additionally, we opine that the therapeutic sector, dedicated to treating diseases, disorders, or medical conditions through various therapeutic interventions will also experience increased demand. This heightened demand within the therapeutic sector is expected to drive the development of innovative solutions to tackle the growing complexity and prevalence of chronic and infectious diseases. This will contribute to patient volume growth as private hospital players will be better equipped to handle more acute and complex cases.

Maintain OVERWEIGHT. We maintain an OVERWEIGHT rating on Healthcare sector premised on (i) increasingly discerning patients, (ii) greater affordability with accessible credit facilities like credit cards and medical insurance, (iii) rising demand for elective surgeries, (iv) organic sector growth, (v) the digitalization of healthcare services, (vi) a growing trend in health tourism, and (vii) an aging population. These factors collectively enhance the sector's attractiveness and potential for sustained growth. We maintain a strong outlook on IHH (BUY, RM7.17) due to anticipated strong performance driven by increased hospital activities and organic growth. Nova Wellness is also a BUY with a TP of RM0.68 though KPJ (TP: RM1.88) and Apex Healthcare (TP: RM2.41) is a SELL.

Source: BIMB Securities Research - 17 Jul 2024