In 2019 the commencement of the B40HPF could provide the long awaited catalyst for the domestic healthcare sector. Whilst the RM8k cap p.a. would limit accessibility to major treatments (surgery), we believe that the scheme’s funds would be channelled towards ancillary services, potentially increasing the utilization rates of nascent medical equipment. We maintain our OVERWEIGHT rating on the sector. We prefer KPJ to IHH for its wider domestic network, enabling it to tap on a larger proportion of the B40 segment.

Win-win. The Government, regulators and foreign insurance players appear to have come to a compromise on the requirement to divest 30% of their equity stake to a local partner. This compromise has taken the shape of the B40 Healthcare Protection Fund (B40HPF) as announced during Budget 2019.

B40HF. The proposed B40HPF to be managed by BNM will provide the B40 segment with (i) free protection against 36 critical illnesses of up to RM8k p.a and (ii) up to 14 days of hospitalisation income at RM50/day (i.e. RM700 p.a.). The scheme essentially represents a shift of patient volumes to the private sector backed initially by a private sector led funding model.

Policy shift. This policy shift essentially provides (i) a federal framework for PPP (public private partnerships) between the MOH and private hospitals, (ii) it’s in line with the goal of bridging the gap of insurance coverage for the B40 segment and (iii) in our view, sets in motion a structure for a national healthcare insurance scheme in similar vein to Medicare (Australia) and NHS (UK) in future, whereby healthcare is funded by the public, lessening the burden on the government’s coffers.

Ancillary service. The cap of RM8k per annum will limit accessibility to major treatments (surgery). We are inclined to believe that the scheme would be channelled towards ancillary services- diagnostics (MRI, CT-scans and pathology) at private hospitals, thus potentially increasing the utilization rates of nascent medical equipment albeit at a volume discount rate.

Credit risk. Downside risk to the sector arising from the B40HPF would stem from credit risk similar to the experiences of KPJ with the BPJS scheme in Indonesia. This was largely caused by loosely defined treatment coverage under the scheme, resulting in a mismatch between treatment provided and charges the schemes proprietor were willing to pay. Nonetheless, stakeholders in Malaysia would be well equipped to navigate these virgin waters drawing on experiences from our neighbours.

Pharma. Pharmaniaga remains competitive for the concession model due to their (i) expertise in cold chain pharmaceutical L&D (ii) the margins from the concession business is unattractive (c.1%-2%) to attract other distributors who enjoy greater margins from distributing to the private sector. We expect the Pharmaniaga to continue with the concession which expires (Nov 2019), and potentially renewed on an annual basis whilst the MOH trashes out new service level terms and agreements. This was also the case in the last concession cycle (signed in 2011).

Maintain OVERWEIGHT. We believe that a seismic fundamental shift is occurring within the domestic Malaysian healthcare space. We prefer KPJ (BUY, TP: RM1.27)

over IHH (HOLD, TP: RM5.32) as geographically, KPJ has presence in every state (except Terengganu & Melaka). Network wise, KPJ also has a higher number of hospitals (26) which cover the semi-urban areas and smaller towns thus enabling it to tap on a larger proportion of the B40 segment.

Source: Hong Leong Investment Bank Research - 11 Jan 2019