As we adjust and transition towards a new normal, we expect to see a continuous recovery in patient footfall, as patients return to hospitals to receive treatment for their delayed procedures. The reopening of international borders in Malaysia should also result in an influx of medical tourists, given Malaysia’s position as the leading destination for medical tourism. All in, we are OVERWEIGHT on the healthcare sector, as we opine that the lifting of pandemic restrictions will continue to fuel the sector’s recovery and is likely to experience a quicker recovery compared to other economic sectors. Our top pick for the sector is IHH Healthcare (BUY, TP: RM7.51).

Budget 2022. Larger allocation of RM32.4bn (+1.6% YoY) was granted to the Ministry of Health (MoH) in Budget 2022. The increase in budget would be beneficial for both Pharmaniaga (BUY, TP: RM1.04) (via more drug purchases as is the current sole concession holder to distribute drugs and consumables) and Edgenta (BUY, TP: RM2.23) (via the procurement of new biomedical equipment as well as maintenance of the said equipment). Pharmaniaga has recently received a one-year extension for its concession business, commencing 1st Jan 2022. MoH’s decision to grant an extension did not come as a surprise, given Pharmaniaga’s historically proven track record and the infrastructure (logistics and IT systems) it has in place to handle the concession business. We are positive on this development, as the extension would provide continued earnings visibility for FY22.

Covid-19 fund. In Budget 2022, the government has also set aside a RM4bn budget to combat Covid-19, whereby RM2bn will be used for vaccination expenses, while the remaining RM2bn is earmarked to enhance the capacity of public health services. The potential procurement of Sinovac vaccines to be used as boosters would also be positive for Pharmaniaga. Note that there are currently c.11m Sinovac vaccinated individuals in Malaysia, hence that should translate to a maximum potential demand of c.11m doses of Sinovac boosters.

Continued recovery in patient volumes. Moving into 1H22, we expect inpatient volume for KPJ Healthcare (BUY, TP: RM1.32) and IHH Healthcare (BUY, TP: RM7.51) to continue recovering, following the relaxation of movement restrictions. The recovery in patient footfall will mainly be supported by returning patients seeking medical treatment for their delayed elective procedures. We highlight that after every easing of movement controls (i.e. 3Q20 and 2Q21), the hospital operators would experience an uptick in patient volume (see Figure #2 and #3). However, we expect the recovery this time around to be more sustainable, in view of the higher vaccination rate in Malaysia.

Potential return of medical tourism. An allocation of RM20m was also given to the Medical Healthcare Tourism Council (MHTC) to attract more foreign patients. We believe that this would be advantageous for both IHH and KPJ once the Malaysian borders reopen. IHH’s Singapore operations saw an influx of medical bookings upon the commencement of Singapore-Indonesia vaccinated travel lane (VTL). We expect the Malaysian hospital operators to experience the same strong rebound in foreign patients, given Malaysia’s position as the leading destination for international patients.

Edgenta. With the Covid-19 situation stabilising in Malaysia, congestion in the public healthcare system is likely to ease but we expect the patient volume to be partially displaced by non-Covid patients. MoH has estimated that there are c.200k cases of backlog surgeries (including elective procedures) in the public healthcare system as at early-November 2021, of which c.60k cases are categorized as emergency and semi-emergency. Hence, we reckon that Edgenta’s healthcare support division should continue to benefit from the extra maintenance work and replacement required for the biomedical equipment in the public hospitals. As for its other divisions (i.e. asset consultancy, property & facilities solution and infrastructure services), progressive recovery is expected as we emerge from the pandemic. However, it is unlikely that business activities in these segments could recover back to its pre-pandemic levels in 1H22, considering that the backlog of deferred maintenance and projects over the past 2 years are unlikely to be cleared within 6 months.

Maintain OVERWEIGHT. We continue to like the sector, as we are anticipating a more sustainable recovery as we transition into normalcy, riding on Malaysia’s high vaccination rate and an ongoing rollout of booster shots. We also expect the healthcare sector to bounce back stronger than other economic sectors, given the sector’s more resilient nature. Our top pick for the sector is IHH Healthcare (BUY, TP: RM7.51), as we like the group’s regional diversification that should mitigate the impact of patient volume loss, should a resurgence of Covid-19 cases hit any of its key operating markets.

Source: Hong Leong Investment Bank Research - 6 Jan 2022