• Private Hospitals Driving Healthcare Growth. For private hospital players, both IHH and KPJ posted double-digit growth in revenue and earnings in 9MFY24. Key growth drivers include an aging population, the rising prevalence of chronic diseases and advancements in healthcare infrastructure and medical technologies. Looking at the broader healthcare, KL Healthcare Index is currently trading at 41.7x PER, slightly below its 5-year average PE of 42.4x. Among the players under our coverage, KPJ Healthcare stands out as the top performer, with a remarkable YTD stock gain of +65% and a relative outperformance of +48%, reflecting strong investor confidence. IHH Healthcare also delivered solid growth, with a +20% YTD increase and +7% relative performance.
  
  Conversely, Apex Healthcare experienced a slight decline in stock value (-1%) and Nova Wellness faced significant challenges, with a -31% YTD decline. This mixed performance across the sector highlights varying market sentiment, with hospital players outperforming pharmaceutical and nutraceutical peers.
  
  Nonetheless, we anticipate hospital players will sustain robust growth in FY25. Note that the healthcare sector remains a national priority, as evidenced by the government's RM45.3bn allocation in Budget 2025, marking a 10.0% YoY increase from RM41.2bn in Budget 2024. Additionally, increased patient volumes in private hospitals are expected to drive greater demand for pharmaceuticals, particularly for chronic conditions and specialized medications.

• Resilient Private Hospital Demand amid Rising Health CPI. Looking at Chart 2, CPI and Health CPI highlight an inversely proportional relationship. Note that Food prices, which make up 30% of the CPI basket, can fluctuate significantly due to external factors such as supply chain disruptions, weather conditions and global commodity prices. In contrast, healthcare costs, with less than a 2% weight in the CPI basket, tend to rise steadily over time, driven by structural factors like advancements in medical technology and increased demand for healthcare services. This disparity in weight and behavior often makes the two indices appear to move in opposite directions.
  
  In Malaysia, Health CPI has a steady upward trend, reflecting rising costs in medical services, pharmaceutical products and hospital care. These increases are driven by factors such as the adoption of advanced medical technologies, an aging population and growing demand for quality healthcare services. While this aligns with global patterns, it raises concerns about affordability of private healthcare.
  
  Based on our observation, within the Medical Products, Appliances & Equipment component, inflation has remained stable at below 2% over the past five months. However, the Health Services component has seen a consistent rise of around 4% since mid-2024 (Health Services inflation has averaged 0.6% annually since 2017), likely driven by increasing demand. Despite these inflationary pressures, we expect the impact on private hospital demand to remain minimal in the near term, as healthcare providers can pass on the costs to consumers. Given the inelastic nature of healthcare demand and its prevalence among middle- and high-income groups, private hospital demand is expected to remain robust.
   
• More Time Needed for Effective DRG Implementation. The Malaysian government is considering revising the Private Healthcare Facilities and Services Act 1998, which regulates private healthcare services in the country. This review is necessary to address emerging challenges, such as rising healthcare costs and the introduction of evolving healthcare delivery models like the Diagnosis-Related Group (DRG) system. Malaysia plans to implement the DRG system early next year to help manage escalating private healthcare costs. Note that DRG is a payment model that groups patients based on the type and complexity of their medical conditions, rather than itemizing individual charges. It is widely implemented in advanced countries, and some Asian nations like South Korea, Japan and China have also adopted it.
  
  Based on our channel check with the Private Healthcare Malaysia Association (APHM), the association is actively engaging with the Ministry of Health to share concerns and suggestions. Taking IHH as an example, its 25% share of the hospital bed market and contribution of about 20% of its revenue from Malaysia operation, compared to KPJ, which operates solely in Malaysia and holds over 30% of the market share; the DRG system will likely impact KPJ more. On top of that, the transition from a fee-for-service model to DRG requires significant upgrades to Malaysia’s healthcare data infrastructure, including medical coding and electronic health records. It will also require training, clear pricing structures and benchmarks for hospital costs. Monitoring frameworks will be essential for successful implementation. Therefore, we believe that implementing the DRG system by 2Q25 is ambitious and more time is needed to ensure effective implementation, which will help control costs and improve transparency for patients. However, while DRGs aims are to improve efficiency and control costs, there is concern that they may lead to quicker discharges or reduced care for patients with complex needs.
   
• Driving Smart Hospitals with 5G to Enhance Patient Outcomes. According to McKinsey & Company, the healthcare sector has one of the lowest digital consumer adoption rates globally, ranking behind industries like entertainment, banking, and utilities. However, integrating 5G connectivity with healthcare technologies has the potential to revolutionize the sector, enabling advancements such as personalized treatment algorithms and immersive medical training. Regional leaders like South Korea and Singapore exemplify the potential of 5G in healthcare. South Korea has achieved a 25% efficiency boost in hospitals leveraging 5G for real-time monitoring while Singapore’s telehealth market is growing at a 25% CAGR, driven by extensive 5G coverage.
  
  In Malaysia, 5G adoption remains under 50%, but innovations such as KPJ’s 5G-enabled VSI HoloMedicine for surgical planning and Gleneagles BGS Hospital's 5G ambulance services in South India are paving the way for future growth. The deployment of 5G also facilitates AIpowered smart hospitals, supporting applications like electronic health records (EHR), connected medical imaging, and remote medicine management, which streamline workflows and improve patient outcomes. Private hospitals in Malaysia, such as Sunway Medical Centre and KPJ Healthcare, are advancing toward smart hospital transformations. Sunway Medical Centre has earned recognition for its innovative use of smart hospital technology, receiving the prestigious 2022 Malaysia Smart Hospital Company of the Year award from Frost & Sullivan. Similarly, KPJ Healthcare has launched the KPJ Cares App, integrated telemedicine for virtual consultations, and is heavily investing in digital transformation programs. The new Damansara Specialist Hospital 2 (DSH2) represents a significant milestone in its digital journey.
  
  While Malaysia lags behind regional leaders in 5G penetration and healthcare digitalization, local hospital players increasing focus on telemedicine and smart hospital transitions highlights significant growth potential. As 5G adoption expands, it is expected to drive transformative changes in healthcare, enhancing operational efficiency, improving patient outcomes and addressing the sector’s evolving demands.
   
• Expect Sustained Growth Momentum. We anticipate private hospital operators to achieve double-digit earnings growth in FY25, driven by consistent increases in inpatient and outpatient visits, with the recovery in admissions extending into 2025 amid strong demand for private healthcare services in Malaysia. Organic capacity expansions are expected to enhance revenue from health tourism. While contributing less than 15% of revenues for KPJ and IHH, it is poised for growth through healthcare digitalization initiatives such as modernization of facilities, rising chronic disease prevalence, and increased healthcare spending, with Malaysians now spending over RM2,022 per person on healthcare, up 17% from 2020 levels. This reflects heightened demand and health awareness post-pandemic. Additionally, rising patient volumes will boost pharmaceutical demand, particularly for chronic and specialized medications, with biopharma players like Pharmaniaga (Non-Rated) making notable progress, such as the development of Wosulin, a recombinant human insulin.

• Accreditations Boost Malaysia’s Healthcare Reputation. ESG practices are becoming increasingly critical across industries, including healthcare, where "Social" and "Governance" components hold greater importance than "Environment." In Malaysia, healthcare providers like IHH and KPJ have actively embraced ESG principles, addressing key challenges and adhering to global standards. The "Social" aspect is vital due to its direct impact on human well-being, while "Governance" is crucial given healthcare’s status as one of the most heavily regulated sectors. These regulations ensure quality care, support government policies, and address rising demand. IHH is certified by national bodies such as MSQH in Malaysia and international organizations like Joint Commission International (JCI). The group is also working toward further accreditations in data privacy, underscoring its commitment to ESG principles. Similarly, KPJ also upholds rigorous standards, with all its hospitals accredited by MSQH and several by JCI. Additionally, KPJ is a member of pivotal industry associations like the Malaysia Medical Council and the Malaysia Healthcare Travel Council (MHTC), which ensures excellence in services for local and international patients. Malaysia’s focus on healthcare quality is further supported by initiatives such as the MHTC program, where members undergo comprehensive evaluations of healthcare and support services, enhancing their global reputation. We believe that healthcare providers in Malaysia have generally taken adequate measures to address essential ESG factors, and they do not seem to have significant ESG-related issues.

• Maintain OVERWEIGHT on healthcare sector. We maintain an OVERWEIGHT rating on the healthcare sector, supported by (i) organic capacity expansion, (ii) growing demand for elective surgeries, (iii) improved adoption of healthcare digitalization, (iv) increased revenue from health tourism, and (iv) rising demand driven by an aging population. Our BUY recommendation for IHH (TP: RM8.60) remains intact, driven by expectations of strong performance from increased hospital activities. For KPJ, we maintain a HOLD rating with TP of RM2.52. We believe the upside potential is limited as the market has likely priced in these expectations, reflected in KPJ’s share price, which has risen 60.1% YoY

Source: BIMB Securities Research - 8 Jan 2025