The recent coronavirus outbreak is likely to have minimal impact to the Malaysia healthcare sector in the near term. Nevertheless, long term, we believe the rising healthcare awareness arising from the outbreak should be positive for the sector. We maintain our Overweight rating on the Healthcare sector and recommend investors to position defensively in the sector. Our top pick is Apex Healthcare. On a positive note, a possible retraction of the proposed medicine price controls, potentially due to the already competitive pricing in Malaysia and the fear of losing access to the latest and most innovative single-source medicines, could be a positive catalyst to the private hospital operators.

Coronavirus Outbreak Likely to Have Minimal Impact to the Sector

We think that the coronavirus outbreak is likely to have only a muted impact on the private hospital operators as the private hospitals are required to report and refer such cases to public hospitals and the national infection centre based on MoH guidelines. While we note that the pharmaceutical players could potentially benefit from a surge in demand for products related to the prevention of seasonal viral diseases with similar symptoms, the impact to their respective bottom lines is likely to be minimal.

Relatively Resilient Amid Market Uncertainties

Although not entirely recession-proof, healthcare spending is relatively inelastic and less prone to market uncertainties. Healthcare stocks under our coverage have long-term adjusted betas of <1, displaying the low sensitivity of the sector to global growth.

Proposed Medicine Price Controls Likely to be Called Off

We gather that the proposed medicine price controls may not materialise in the near term, possibly because medicine prices in Malaysia are already relatively competitive and due to the risk of losing access to the latest and most innovative medicines. Alternatively, declaration of prices may be encouraged to improve transparency and encourage competition. We think that the possible calling off of the proposed medicine price controls could help to mitigate the current overhang on the private hospital operators.

Maintain Overweight, With Apex Healthcare as Our Top Pick

We maintain our Overweight view on the sector with Apex Healthcare as our preferred pick. We continue to like the sector for its defensiveness and long-term growth prospects. Going into 2020, we recommend positioning in the pharmaceutical space as a potential earnings recovery play and beneficiary of the government’s initiatives to liberalise the drug distribution in the country. Key downside risks include sharp declines in patient volumes, higher-than-expected start-up losses for new hospitals, execution risk, currency risk, product recall risk and regulatory risk.

Source: Affin Hwang Research - 12 Feb 2020