Healthy Prospects Ahead

We upgrade our call on the Healthcare sector to Overweight as we upgraded IHH Healthcare to Buy post 4Q17 result. Companies within the sector reported satisfactory FY17 numbers, with 2 above and 2 in line with expectations. Going into FY18, hospital operators should deliver robust earnings growth on the back of new hospital openings, recovery in private healthcare spending, lower start-up losses and benign competition. The pharmaceutical outlook remains positive, supported by secular demand for prescription drugs and strong monthly export numbers. Our top picks are KPJ and Apex Healthcare.

Recovery of Inpatient Volume Growth

KPJ’s inpatient admissions registered 2.4% yoy growth in FY17 after 2 years of flattish growth, while IHH’s inpatient admissions in its Malaysia operations grew by 2.3% yoy (vs. 5% in FY16 and 0% in FY15). This may signal a recovery in private healthcare spending after seeing the private hospital’s inpatient market share decline from the peak of 32.1% in 2013 to 29.4% in 2016. Hospital expansions and greenfield projects from both KPJ and IHH in FY18 should lead to increases in operating beds. We estimate 4% yoy and 6% yoy inpatient volume growth for KPJ and IHH respectively.

Manageable Competition and Increased Insurance Coverage

Our studies show that the average number of hospital beds (public and private) was c. 1.9 per 1,000 population in FY17, which is below the global average of 2.6. Figures for some states were as low as 1.1-1.4, suggesting that there is room for secular demand growth. In addition, rising income per capita and increased insurance coverage are key drivers to support private healthcare expenditures in the long run.

Pharmaceutical’s Outlook Remains Positive

YSP and Apex Healthcare’s FY17 revenue grew by 10% yoy and 7% yoy respectively, underpinned by stable growth of c. 9% yoy growth in the pharmaceutical market. We saw a rising contribution of local generic drugs to substitute patented and imported drugs. Monthly export numbers of pharmaceutical products from Malaysia continue to show steady growth in the past few months. We believe all these positive factors support our upgraded Overweight view on the pharmaceutical sector.

Upgrade Healthcare Sector to Overweight

Despite the underperformance of IHH and KPJ’s share prices YTD, we think that the sector’s earnings prospects are being overlooked. We believe IHH’s earnings growth should return when its new hospitals mature, while KPJ’s new hospital openings should draw higher patient volume growth. We maintain our BUY rating on YSP due to its growing exports in the SEA region. Apex Healthcare’s earnings in FY18E should be supported by steady demand for pharmaceutical products while contributions from SPP NOVO by year-end will be a growth catalyst in the medium term.

Source: Affin Hwang Research - 22 Mar 2018