• Still OVERWEIGHT; KPJ Healthcare (KPJ) is still the sector Top Pick. For the Sep 2023 reporting quarter, one of the four healthcare names under our coverage, IHH Healthcare (IHH) saw in-line performance, while the rest came in below expectations. We expect inelastic demand, organic expansion, and a pick-up in M&A activities to drive sector growth in 2024. Strong patient footfall could lead to a spill-over effect to the pharmaceutical players under our coverage.

• Hospital players. KPJ saw a commendable 3Q23 notwithstanding 3Q22’s high base, aided by organic growth (inpatient visits: +13% YoY), a better patient mix, and higher bed occupancy rate (BOR). Hospitals under gestation continued to report narrowing EBITDA losses, while its health tourism (HT) segment saw 19% YoY and 13% QoQ revenue growth (5.5% of group revenue). IHH’s 3Q23 numbers were above expectations on a better case mix, robust patient footfalls, and the consolidation of newly acquired entities. Patient volumes across geographical regions grew in the range of 1-11% YoY, while the nursing shortage issue in the Singapore division appears to have been resolved, resulting in a better BOR of 62%.

• Pharmaceutical. Duopharma Biotech’s (DBB) 3Q23 earnings were weaker than expected, no thanks to its consumer healthcare (CHC) division’s sluggish performance and subdued public sales, which were dragged by a shorter tendering period for the procurement of products under the Approved Products Purchase List (APPL), as supply and delivery were on a purchase-order basis vs the annual tendering period under the APPL model. Kotra Industries’ (Kotra) 1QFY24 results were below expectations due to lacklustre performance from its local sales division as concerns of drug shortages dissipated post pandemic.

• Outlook. We remain O/W on the sector, given the relatively inelastic demand trends, coupled with rising health awareness and a rapidly ageing society to anchor generic drug makers’ mid-to-longer-term prospects. We maintain KPJ as our Top Pick, underpinned by its key strategic initiatives, encouraging growth in the HT segment, digital transformation plan – which offers room for further margin expansion – and gradual improvements in operating efficiency as hospitals under gestation start contributing meaningfully by 2024. We expect KPJ’s valuation to improve gradually vis- à-vis IHH. KPJ is trading at 11x EV/EBITDA, against IHH’s 12.5x. For the pharmaceutical sector, we still expect the momentum of drug restocking activities to normalise. RHB Economics sees a rosier growth outlook in 2024, underpinned by economic activities picking up in 1H24. We expect this to have a positive impact on CHC sales, as pharmaceutical products are considered discretionary spending.

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

Source: RHB Securities Research - 6 Dec 2023