Highlights

• Despite the persistent weakness in consumer sentiment and economic headwinds, 9MFY15 overall earnings of healthcare companies under HLIB universe grew resiliently.

• In terms of share price performance, healthcare counters outperformed the market by an average of 31.2% YTD.

• Given its recession proof nature, healthcare companies are expected to perform relatively well. However, given the higher cost of living and economic uncertainties in Malaysia, we expect a moderate growth for the healthcare sector in year 2016.

• Some of the positive factors that will continue to support the growth of healthcare companies are: (1) Continued increase in National Income (Wealth); (2) Rising Ageing Demographics; (3) Higher Insurance Coverage; and (4) Popularity of Medical Tourism.

• Despite the presence of positive vibes for the sector, we maintain our Neutral view on healthcare sector mainly due to (1) rich valuations of companies in the sector with low dividend yield; (2) lack of rerating catalyst(s); and (3) competitive pressure on margins.

• Within the healthcare sphere, our top pick is Pharmaniaga.

Valuation

• is considerably attractive compared to other pharmaceutical-related stocks. We expect higher contribution from its Indonesia and non-concession segment in 2016. Earnings driver for the group would be: (1) Contribution from its three teaching hospitals; (2) European Union Good Manufacturing certification which would provide the group with stronger footing in European market; and (3) Patent cliff.

• Also, as Pharmaniaga is the sole concession holder to purchase, store, supply and distribute drugs and medicinal products to over 148 government hospitals and 1,400 clinics, we believe the group shall benefit from the RM4.6bn allocation stated in Budget 2016.

Risks

• Political / regulatory / competitive / FOREX risks;
• Introduction of medicine price control; and
• Prolonged erosion in consumer sentiment due to higher cost of living and further subsidy removals.

Rating

• /

Valuation

• NEUTRAL
• Maintain NEUTRAL on the sector with the following rations:
• IHH (HOLD, TP: RM6.34, based on SOP valuation).
• Pharmaniaga (BUY, TP: RM6.93, 15.8x FY16 EPS pegged to 10% discount to US peers).
• CARiNG (SELL, TP: RM1.16, 20.9x CY17 EPS). Higher TP as we roll forward our valuation to FY17.
• Adventa (HOLD, TP: RM1.02, 19x CY16 EPS pegged to 25% discount to Asian healthcare players).

Source: Hong Leong Investment Bank Research - 8 Jan 2016