• Favourable demographics still the main driver
• More public-private sector partnership expected
• Higher participation from smaller players
• Resilience in earnings expected despite persistent cost pressures
• Maintain POSITIVE on the sector

Favourable demographics still the main driver. We reiterate our view that the demographics shifts and developments in the markets that the operators are in will continue to bode well for the sector in 2016-17. The demographic factors that encourage the adoption of private healthcare services are (i) increase in ageing population, (ii) increase in lifestyle diseases, (iii) increasing awareness on health diseases, (iv) improvement in standard of living, and (v) urbanisation. Furthermore, with Ringgit at its current levels, we also reckon that Malaysia is faring better vis-à-vis neighbouring countries in attracting medical tourism traveller seeking medical treatments. In addition, the increasing adoptions of medical insurance policy and employer tie-up with private hospital operators are also expected to encourage the usage of private medical services. According to Frost & Sullivan, at the current growth rate, Malaysia’s healthcare expenditure will reach USD20bn by 2020.

More public-private sector partnership expected. We are expecting to witness an increase in public-private sector partnership happening within the industry in the medium term due to the increasing demand. Currently the average nationwide bed occupancy ratio (BOR) in the government hospitals stands at about 68.2% and the Ministry of Health (MoH) is concentrating on equipping the public hospitals with departments and machineries which focuses more on oncology and various complex cases. This has indirectly led the responsibility of providing primary healthcare services to shift from the public sector to the private sector in order to reduce the pressure on the public sector. This is also so that the public sector can concentrate more on providing services to the lower income patients and those with more complex health issues.

Higher participation from smaller players. The rising demand for private healthcare, its resilient earnings profile and earnings visibility have encouraged some existing smaller players to expand their operations as well as attracting new players into the healthcare business. Some of these players are TDM Bhd and Oriental Holdings Bhd with new pipeline of beds planned for the next 2-3 years.

Resilience in earnings expected despite persistent cost pressures. For FY16, we are expecting both hospital operators to continue recording a low-double digit revenue growth of about 11-12%yoy stemming from both organic growth from existing hospitals as well as newly commissioned hospitals. Despite the increasing cost pressure from the volatile currency market as well as inflationary effect on medical consumables, we believe the hospital players will be able to maintain their PAT margin via: (i) various forms of cost control, and (ii) increasing complex cases mix.

Maintain POSITIVE. We are maintaining our POSITIVE view on the sector with IHH Healthcare as our Top Pick due to: (i) strong earnings growth forecasted for FY16-17, (ii) strong management team, (iii) robust balance sheet, and (iv) welldiversified revenue base. At present, we believe that there is potential for further upside to the earnings of both IHH and KPJ should operational environment improve in 2HFY16. Backed by strong demand for private healthcare services especially in the urban areas, we opine that private healthcare operators will continue to be the preferred choice for the urban dwellers with higher disposable income and insurance coverage.

Source: MIDF Research - 30 Sep 2016