• OVERWEIGHT; Top Pick: KPJ Healthcare (KPJ). Our unchanged sector weighting is premised on the healthcare industry’s defensive nature, as well as it benefiting from the recovery in the number of local and foreign patient visits. Meanwhile, robust drug procurement activities – on the public and private sector fronts – should underpin a healthy performance for the pharmaceutical companies we cover, amid softer demand in the over-the- counter (OTC) format. KPJ is our sector Top Pick, as we believe that its greater domestic focus grants it greater earnings stability.

• Healthcare service providers. We expect KPJ’s earnings growth to be anchored by: i) Better operating efficiency (several new hospitals are nearing the end of their gestation periods); ii) a gradual increase in contributions from the healthcare tourism (HT) segment; iii) 3% earnings accretion to our 2023F sector earnings, due to the proposed disposal of its loss-making Indonesia business. Meanwhile, we are still cautiously optimistic on IHH Healthcare (IHH), even though it booked strong operating metrics – as it may face headwinds from ongoing nurse shortages (predominantly in its Singapore segment), and a hyperinflationary environment in Turkey. Having said that, the recent normalisation of wholesale electricity prices in Turkey post normalisation of natural gas costs could offer some relief to its Turkish unit, in 2H23.

• Pharmaceuticals. 2023 will likely be a muted year for the local drugmakers, given the high base of 2022. We do not expect to see panic purchases from consumers, as concerns over drug shortages (primarily OTC products) continue to dissipate. Nonetheless, the normalisation of raw material prices and easing supply chain bottlenecks – which should then lead to lower freight costs – should alleviate margin pressure in 2023 which, in turn, will be offset by higher electricity tariff rates and labour costs. We are maintaining our NEUTRAL stance on Kotra Industries due to the various headwinds mentioned above. Meanwhile, we are mildly positive on Duopharma Biotech, underpinned by its larger exposure to the private healthcare sector (43% of 2022 revenue) which continue to see robust patient traction.

• KPJ is our sector Top Pick. Both IHH’s and KPJ’s HT segments have recovered back to pre-pandemic levels, aided by the reopening of international borders. We expect their revenue intensity to normalise, as patients who previously deferred their elective surgeries are expected to return for these procedures. KPJ is still our sector Top Pick, underpinned by its robust patient growth trajectory, being less impacted by nursing staff shortages, as well as the successful disposal of its loss-making Indonesian operation in 1Q23. As we remain sanguine in our outlook for the healthcare service providers, we think KPJ’s greater domestic focus also grants it greater earnings stability.

• Key downside risks to our sector call: Higher-than-expected operating costs, lower-than-expected patient visits/revenue intensity growth, and an unfavourable drug pricing mechanism from the Ministry of Health.

Source: RHB Research - 9 May 2023