Shot in the Arm From Deliberated Policies

We expect the generic pharmaceutical producers to be best poised to benefit from the deliberated policies overlooming the healthcare sector. However, organic recovery and the sheer size of an expanded healthcare expenditure should well catalyse the sector. Maintain Overweight on the Healthcare sector. Our top pick for the sector is KPJ Healthcare (KPJ) which we like for its improved domestic outlook and attractive valuations.

2Q18’s Impressive Results a Precursor to 2H18

2Q18 core net profit for the four healthcare companies under our coverage have all exceeded consensus expectations. Going forward, KPJ and IHH Healthcare (IHH) should see more robust patient volume growth off a low base attributed to a slight seasonal slump in 3Q17 due to the timing of the Raya season and the gradual structural recovery in broad consumer affordability. Both face contrasting foreign fortunes. While KPJ’s Indonesia operations have now stabilised and is expected to see minimal losses, IHH will likely see enlarged translation Turkey losses in RM given the sharp depreciation in the Lira taking effect in 3Q18. Meanwhile, Apex Healthcare (Apex) could raise ASPs in 4Q18 depending on market conditions post SST implementation.

Evolving Healthcare Policy

The new Pakatan government in its election manifesto aimed to elevate health expenditure from 4% of GDP to up to 6-7% of GDP. Increased allocation represents a 50-75% surge in healthcare expenditure but the source of funding appears uncertain at this juncture. Based on deliberated policy changes, it is possible that the M40 (middle 40% of Malaysian households by income) and T20 (Top 20%) may pay more for outpatient treatment while B40 (Bottom-40%) appears to be government subsidised. More importantly, we examine and identify the impact of 3 prominently deliberated healthcare policies, i) Peduli Sihat nationwide implementation, ii) tripling of standalone private clinics consultation fees and iii) monopoly breakup of pharmaceutical concession. While the generic pharmaceutical producers are the most likely to benefit, the sheer size of an expanded healthcare expenditure should well catalyse the sector.

KPJ Is Our Top Pick.

KPJ’s current P/E and EV/EBITDA valuations are both trailing its historical valuations (Fig. 8 and 9) and its peers (Fig. 10). We believe valuations should even trade a premium to its historical mean seeing domestic prospects are improving against diminishing regional risk factors. Domestically, we expect patient volume to recover off a low base against a high fixed operating leveraged supplementing healthy 3-year earnings 2017-2020 CAGR of 10%. Additionally, we expect regional risk factors to dissipate going forward.

Source: Affin Hwang Research - 18 Sept 2018