Reiterate OVERWEIGHT. We see earnings resilience in 2023 for all the three areas of healthcare under our coverage, i.e. private hospitals (the return of elective surgeries), pharmaceuticals and over-the-counter (OTC) drugs (the rising health consciousness trend) and immunotherapy (its rising adoption as a type of cancer treatment). Over the longer term, the growth prospects of the healthcare sector will continue to be underpinned by an aging population, rising affluence and growing chronic diseases across the globe such as cardiovascular diseases, cancer and respiratory diseases. Our top picks for the sector are IHH (OP; TP: RM7.20) and KOTRA (OP; TP: RM7.00)

Private Hospitals

Global healthcare expenditures are projected to reach a total of USD10t by 2026, increasing from USD8.4t in 2022, representing a CAGR of 3.5% during the five-year period (see chart on next page). Amplifying the demand for private healthcare are rising chronic diseases across the globe. Specifically, WHO reported that almost half of the global healthcare expenditures (USD4t) will be spent on three leading causes of death: cardiovascular diseases, cancer and respiratory diseases.

We project IHH’s patient throughput growth and revenue intensity to drive 2023 earnings as demand for non-Covid related services including elective surgeries recovers.

In 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. an estimated 10%-20% in 2022), inpatient throughput growth of 10%-15% (vs. an estimated 12%-25% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. an estimated 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Turkey. We believe the key growth for its inpatient throughput and BOR will be the return of elective surgeries and medical travel, the addition of new beds (constrained previously by staff shortages) and the first full-year contribution from the Acibadem Ataşehir hospital.

We like also like IHH for its pricing power as the inelastic demand for private healthcare service allows providers such as IHH to pass on the higher cost amidst rising inflation, and its presence in multiple markets, i.e. Malaysia, Singapore, Turkey and Greater China. 

Similarly, in 2023, we expect KPJ’s (OP; TP: RM1.16) patient throughput to grow at 12% (vs. an estimated 26% in 2022 due to the low base effect in 2021) while its BOR at 66% (vs. an estimated 55% in 2022) will be driven by recovery in demand for its services, particularly, non-Covid-related ones including elective surgeries.

Similarly, we like KPJ for its pricing power as a private healthcare provide and its strong market position locally with the largest network of 28 private hospitals (vs. 16 of the next largest player IHH).

Health Supplements and OTC drugs

Independent market researcher The Statista Consumer Market Outlook projects the OTC pharmaceuticals market in Malaysia to grow at a CAGR of 6% to an estimated USD715m (RM3.2b) by 2027 as consumers take a more proactive stance towards their health and well-being (including taking health supplements on a regularly basis), especially in the aftermath of the Covid-19 pandemic.

This augurs well for KOTRA that manufactures and sells OTC supplements and nutritional and pharmaceutical products with key flagship household brands such as Appeton, Axcel and Vaxcel. We also like KOTRA for: (i) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, and (ii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing).

Meanwhile, backed by a new plant, widening distribution network and penetration into local public hospitals, NOVA (OP; TP: RM1.09) guided for a 15-18% volume growth, following an average volume growth rate of 16-18% in FY20-22. Specifically, its FY23F volume growth will be fuelled by the full-year impact from 35 new SKUs introduced in FY22. We like also NOVA for its business model which encompasses the entire spectrum of value chain from product conceptualisation starting from R&D to manufacturing.

However, the same cannot be said for PHARMA (MP; TP: RM0.52) which growth in 2023 will be pedestrian in the absence of lumpy vaccine sales. We expect its concession awarded by the Ministry of Health to provide medical supplies to public hospitals will be renewed upon expiry in end-2022. Meanwhile, we believe its Indonesia operation will continue to be driven largely by the growing product portfolio at its manufacturing arm. The recurring earnings backed by its long-term medical supply concession with the Ministry of Health will anchor a dividend yield of >5%.

Immunotherapy

According to Immunotherapy Drugs Market by Type, Therapy Area, End User - Global Forecast to 2025 by India based market research firm projects the size of the global immunotherapy market is projected to grow to USD275b by 2025 from USD163b in 2020, translating to a CAGR of 11%, driven largely by the rising adoption of immunotherapy in the treatment of diseases especially cancer, as well as post conventional treatments. Meanwhile, according to Verified Market Research, within the segment of cancer immunotherapy alone, the global CAR T-cell therapy market is expected to grow at a CAGR of 63.8% to USD51b by 2028 from USD590m in 2020.

Earnings growth of MGRC (OP; TP: RM1.07) will gather momentum in 2023 driven by maiden contributions from Thailand and the Middle East as it ramps up its distribution network and footprint overseas for its biopharmaceutical products. Already, the group had, in 1QFY23 (Jul-Sep), registered maiden contributions from Thailand and Middle East and expect orders to continue in coming quarters. We like MGRC for its exclusive rights to deliver such immunotherapy treatment in the region under a long-term licensing agreement with reputable principals. In addition, it is also the leading provider of genetic sequencing and analysis in Southeast Asia.

Source: Kenanga Research - 13 Dec 2022