While we are positive on KPJ’s shift in strategy for its Bandar Dato’ Onn Specialist Hospital (BDO) into a full spectrum hospital which should help improve its patient volume, we remain cautious on: i) potential impact from the impending regulation of medicine prices; ii) potential weak inpatient volume growth due to weak consumer sentiments; and iii) start-up losses from its greenfield expansion. Overall, we believe valuation is fair at current levels and do not see any near-term catalyst. Maintain HOLD with an unchanged TP of RM1.00.

Potential Impact From Impending Drug Price Control

On 2 May this year, the Cabinet announced that price control measures for pharmaceutical drugs would be implemented in 2019 to ensure the affordability of drugs. The Ministry of Health (MoH) will use external reference pricing (ERP) to benchmark drug prices in Malaysia, averaging the three lowest drug prices in three countries to determine ceiling prices. Ceiling prices will be imposed at the wholesale and retail levels at clinics, hospitals and pharmacies. The specific mechanism to be used has yet to be determined as it is still in the discussion stage. If materialised, KPJ could be adversely impacted as pharmaceutical sales account for c.30% of its total revenue. Based on our sensitivity analysis, every 1% cut in ASP for KPJ’s pharmaceutical drugs would reduce its core net profit by 1% in FY20-21E. That said, the group may raise other non-regulated hospital charges to cushion the impact.

Four New Hospitals Coming on Stream by End-2019

While there is some delay to its expansion plan, management is optimistic that its target of four new hospital openings by end of the year remains intact (Fig 1). That said, cautious on any potential further delay, we prefer to err on the conservative side and expect only 100 new beds being added in 2019E (c.3% increase to its total of 3,107 operating beds in 2018). Elsewhere, KPJ is also looking to add more beds at KPJ Perlis (which opened in May 2018) given the encouraging occupancy rate of 66% as at 1Q19 (based on 21 operating beds).

To Remodel BDO Into a Full Spectrum Hospital to Drive Patient Volume

KPJ plans to remodel its BDO specialist hospital into a full spectrum general hospital in order to improve patient volume and shorten the gestation period. Recall that the group’s initial plan was to turn BDO into a centre of excellence with nine disciplines (focused on quaternary care). Opened in February this year, BDO’s current occupancy rate remains low at less than 10% (based on 30 operating beds). While we are positive on the change in strategy for BDO, the contribution from BDO to the group remains insignificant, with only 30 operating beds representing less than 1% of the group’s total operating beds.

Source: Affin Hwang Research - 6 Aug 2019