The sector’s earnings delivery (against our expectations) was stable sequentially in the recently concluded 4QCY23 results. Generally, private hospitals under our coverage were in a seasonally low quarter due to the year-end holidays. On the bright side, both IHH (OP; TP: RM7.00) and KPJ (OP; TP: RM1.95) expect patients to return in subsequent quarters. Meanwhile, health supplement manufacturers KOTRA and NOVA disappointed as consumers cut down on purchases amidst weak spending sentiment. Over the longer term, the growth prospects of the healthcare sector will continue to be underpinned by an ageing population, rising affluence and rising cases of chronic diseases globally. Reiterate OVERWEIGHT. Our top picks for the sector are IHH (OP; TP: RM7.00) and KPJ (OP; TP: RM1.95).

Private hospitals held up better than pharmaceutical players. This quarter marked a stable sequential earnings delivery against our expectations with 20%/80% coming in above/below our forecasts, unchanged from the preceding quarter (see table on Page 2). The disappointment came largely from pharmaceutical players. Out of the five companies under our coverage, only KPJ beat expectations, whereas the other four disappointed, i.e. and NOVA (OP; TP: RM0.74) IHH, PHARMA (UP; TP: RM0.31) and KOTRA (OP; TP: RM5.90).

Private Hospitals

Seasonally weaker 4QCY23 for private healthcare operators, but generally healthy. Generally, private healthcare players in 4QCY23 under our coverage including KPJ and IHH were in a seasonally low quarter due to the year-end holidays. Both players expect patients to return in subsequent quarters as already seen starting from Jan CY24. KPJ’s FY23 results beat expectations, thanks to higher patient throughput (+19%) and higher BOR of 67% (compared to 58% in FY22) as demand for non-COVID related services rebounded including elective surgeries cases (+11%) and average revenue per outpatient (+7%) and inpatient (+7%). However, its net profit doubled, thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA positive), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Batu Pahat. The weaker-than-expected showing from IHH in FY23 was due its less-than-optimum throughput in Singapore and Türkiye operations. Its Türkiye operation was hit by a presidential election, an earthquake and long weekend holidays. On the other hand, Singapore operation was hit by staff shortage which is easing gradually. Overall, IHH’s operating statistics are pointing towards a solid FY23. Specifically, inpatient admissions were largely higher across the board - higher in Malaysia (+17%), Türkiye (+6%) and India (+0.5%) but lower in Singapore (-1%). Revenue per inpatient rose - Singapore (+14%), Türkiye (+38%), India (+14%), and Malaysia (+4%).

Outlook. 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, the WHO reported that almost half of the global healthcare expenditures (USD4t) will be spent on three leading causes of death: (i) cardiovascular diseases, (ii) cancer, and (iii) respiratory diseases.

In 2024, we expect IHH’s revenue per inpatient growth of 12% to 16% (vs. an estimated 19% in 2023 due to low base effect in 2022), inpatient throughput growth of 9%−12% (vs. an estimated 7% in 2023) and bed occupancy rate (BOR) of 65%−73% (vs. an estimated averaging 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye. We believe the key growth factor for its inpatient throughput and BOR would be revenue intensity from a case-mix with more acute cases and medical tourists, the addition of new beds (previously constrained by staff shortages which are gradually easing). We expect sustained performance in Malaysia, while staff shortages in Singapore have been resolved. There is also a return of Middle Eastern and Central Asian medical tourists to its hospitals in Türkiye and India.

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

Similarly, in 2024, we expect KPJ’s patient throughput to grow at 9% (vs. an estimated 7% in FY23) with BOR at 72% (vs. 67% in FY23), driven by revenue intensity emanating from the recovery in demand for elective surgeries.

We also like KPJ for its pricing power as a private healthcare provider 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

Both KOTRA and NOVA’s results missed expectations, while earnings remain resilient. Both KOTRA and NOVA’s 1HFY24 results missed expectations as consumers held back purchases on weak spending sentiment.

Outlook. Independent market researcher Statista in its 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 regular basis), especially in the aftermath of the Covid-19 pandemic.

The trend augurs well for KOTRA which manufactures and sells OTC supplements and nutritional and pharmaceutical products under 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. lowmargin contract manufacturing).

Meanwhile, backed by a new plant, widening distribution network and penetration into local public hospitals, we expect NOVA’s FY24 volume to rise by 8% fuelled by gradual ramp-up of its new plant and the full-year impact from 35 new SKUs introduced in FY22. We also like 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 (UP; TP: RM0.31) which is still under PN17 status. PHARMA’s FY23 results disappointed due to inventories write-downs, product development costs and machinery. The group is currently awaiting approval of its regularisation plan to lift it out of the Practice Note 17 (PN17) status. We project pedestrian earnings growth in FY24-FY25 at level similar to pre-COVID, averaging RM40m-RM60m, driven by regular orders for medical supplies from the Ministry of Health concession. Looking ahead, it is building four new warehouses, being part of a RM220m capex plan to be funded with proceeds from a rights issue and a private placement of new shares. This is to meet the requirement in relation to the government concession to provide timely delivery of drugs and non-drugs products to government facilities throughout the country.

Source: Kenanga Research - 7 Mar 2024