• Overall, the recently concluded 2Q24 corporate earnings season can be deemed favourable. Of note, private hospitals posted revenue growth of more than 20% YoY driven by steady growth in patient volumes.

• Organic capacity expansion among private hospital operators is expected to boost income from health tourism, with Budget 2025 likely introducing measures to further support medical tourism ahead of Visit Malaysia Year 2026.

• We also expect pharmaceutical players such as Apex Healthcare to benefit from stronger ringgit moving forward as it would lead to easing material costs for active materials sourced from Europe, the US, and various Asian countries.

• Maintain an OVERWEIGHT call on the healthcare sector, with our top pick being IHH (BUY, TP: RM7.37). We favour hospital players premised on (i) organic capacity expansion, (ii) rising demand for elective surgeries, (iii) higher receipt from health tourism, and (iv) demand from an aging population.

Strong Earnings for Healthcare Sector, Led by Hospitals but Nutraceuticals Lag

The recent corporate earnings season was positive for healthcare companies. Three out of four companies under our coverage (i.e. IHH, KPJ and Apex Healthcare) meeting expectations, while Nova Wellness underperformed. As for private hospital players, top-line surged by circa 25% YoY and 20% YTD, driven by increased hospital activities and steady growth in patient volumes. This led to strong double-digit earnings growth in 1H24 for both IHH and KPJ. Apex Healthcare, our covered pharmaceutical player, saw top-line growth supported by enhanced sales and marketing efforts, along with the continuous launch of new Group-branded products. However, our covered nutraceutical player experienced lower sales, impacted by higher-than-expected operating expenses.

Private Hospitals to Thrive

We anticipate that private hospital operators will sustain earnings growth of approximately 18% and 12% YoY for FY24 and FY25, respectively, driven by consistent inpatient and outpatient visits. We believe the recovery of inpatient admissions will likely continue into 2025, aligning with the secular demand growth for private healthcare services in Malaysia. Organic capacity expansion among private hospital operators is expected to boost income from health tourism. The Malaysia Healthcare Travel Council (MHTC) aims to generate RM2.4bn in revenue from the health tourism sector this year, up from RM2bn in 2023. In Budget 2025, we anticipate more measures to support the development of medical tourism, in line with the upcoming Visit Malaysia Year in 2026. To recap, the government allocated RM20mn for medical tourism in Budget 2023. However, in Budget 2024, there is no specific allocation for health tourism. Instead, the government has allocated RM350mn for general promotion and tourism activities.

Pharmaceutical Players to Gain from Stronger Ringgit

Regarding the anticipated strengthening of the MYR, we do not expect a significant impact on hospital operators. However, this could affect pharmaceutical players like Apex Healthcare, which sources active materials from Europe, the US, and various Asian countries. We expect material costs to ease next year, driven by the anticipated strengthening of the MYR. Note that our economist projects the MYR to appreciate against the USD, reaching RM4.45 in 2025, compared to RM4.59 in 2024.

Overweight on the Sector

We maintain an OVERWEIGHT rating on the healthcare sector, driven by rising demand for elective surgeries, sector growth, digitalization, health tourism, and an aging population. We also maintain a strong BUY outlook on IHH (RM7.37), anticipating robust performance from increased hospital activities and organic growth.

Source: BIMB Securities Research - 3 Sept 2024