Highlights

• Global population growth: to lead the growing demand for healthcare services. The United Nation’s Department of Economic and Social Affairs forecasts that world population will reach 9.6bn and 10.9bn in 2050 and 2100, respectively.

• Ageing demographics: The world’s population is growing and at the same time, ageing. Over the past years, population of major part of the world is moving into the 65- and-above age bracket. The Population Reference Bureau projects that in 2050, the population ages 65+ will be 2.5 times more than that of the population ages 0-4.

• This provides opportunities for healthcare services due to (1) higher occurrence of age-related diseases, (2) higher requirement for diagnosis and hospital-based treatment; and (3) longer duration of care during recovery phase.

• Community affluence: The increase in wealth implies a trend towards the improvement of basic living standards, including better nutrition, sanitation and healthcare. Euromonitor projects that Malaysian consumer spending on health goods and medical services category will expand at the CAGR of 6.9% from 2011 till 2020.

• Healthcare demand: In a growing and ageing population alongside rising wealth, it is likely to see increasing spending in the healthcare sector. The Ministry of Health has projected that health expenditure will increase from 3.7% of GDP in 2011 to 4.4% of GDP by 2030.

Judging from the abovementioned aspects, demand for healthcare will continue to grow resiliently supported by global population growth, ageing demographics, more affluent community and growing demand. This is undisputable. However, given the lack of rerating catalyst(s) that could significantly boost earnings as well as the rich valuation of some healthcare stocks, we maintain NEUTRAL on the sector.

Catalysts

• Global population growth;

• Ageing demographics;

• More affluent community;

• Resilient healthcare demand; and

• Proliferation of medical tourism.

Risks

• Political / regulatory / competitive / FOREX risks;
• Introduction of medicine price control; and
• Implementation of GST.

Forecasts

• Unchanged.

Rating

NEUTRAL

Valuation

Maintain NEUTRAL on the sector with the following ratings:

• IHH (SELL, TP: RM4.16, based on SOP valuation). Higher TP as we update our model with the latest list of hospital expansion projects.
• Pharmaniaga (BUY, TP: RM5.30, 14.5x FY15 EPS pegged to 10% discount to US peers).
• CARiNG (SELL, TP: RM1.00, 15.5x CY16 EPS pegged to 2x discount to peers average).
• Adventa (BUY, TP: RM1.20, 19x FY15 EPS pegged to 25% discount to Asian healthcare players).

Source: Hong Leong Investment Bank Research - 30 Jan 2015