Highlights

• We organized Bursa-HLIB Stratum Series 1: Healthcare on 2nd of September 2015. We were privileged to have: 1. Dr. Ramli Zainal, Deputy Director of Pharmaceutical Services Division from Ministry of Health, Malaysia; 2. Dato’ Farshila Emran, Managing Director of Pharmaniaga and her management team; 3. Ms. Rhenu Buller & Ms. Fakhirah Roslan, both from Frost & Sullivan. as our distinguished speakers, attended by more than 30 HLIB clients.

• Healthcare expenditure in SEA has grown 12.4% CAGR (2010-2014) and is expected to grow at a double digit rate in Malaysia, or CAGR of 11.0% from year 2013-2020. (See Figure #1)

• For year 2014, Malaysia recorded total healthcare expenditure of 3.9% of GDP, which is still below average and has a vast room to improve. Growth for sector would come from higher healthcare services, pharmaceuticals and medical devices (Figure #2).

• Aged care services in Malaysia are also booming (Figure #3). Based on the research from Frost & Sullivan, it is estimated that Malaysia has appealed to 19,488 retirees from 120 countries to settle in Malaysia since 2002.

• With regards to the status and timeline of Dispensing Separation (DS) plan, it is still unknown and in discussion stage. We believe DS would not materialise any time soon as the debate on the separation of drug prescription and dispensing has been ongoing since 2008 and the need for integration of the current healthcare system to make it viable.

• We maintain neutral on the sector. There would still be demand for healthcare which is supported by population growth, affluent community and ageing demographics. However, it lacks rerating catalyst (s) that could potentially boost earnings coupled with rich valuation of some healthcare stock and competitive pressure on margin.

• Within the healthcare sphere, we prefer the pharmaceutical players. Top pick remains Pharmaniaga. Earnings driver for the group would be: (1) Three teaching hospitals; (2) European Union Good Manufacturing certification which would provide the company with a stronger footing in the European market; (3) Patent cliff; and (4) Pharmaniaga’s Indonesian arm, PT Errita Pharma is expected to breakeven in FY2015.

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

• Maintained.

Rating

NEUTRAL

Valuation

Maintain NEUTRAL on the sector with the following ratings:

• Pharmaniaga (BUY, TP: RM6.93, 15.8x FY16 EPS pegged to 15% discount to US peers).
• Adventa (HOLD, TP: RM1.00, 19x CY15 EPS pegged to 25% discount to Asian healthcare players).
• IHH (SELL, TP: RM4.51, based on SOP valuation).

Source: Hong Leong Investment Bank Research - 4 Sep 2015