• OVERWEIGHT; KPJ Healthcare (KPJ) (KPJ MK, BUY, TP: MYR1.86) remains as our sector Top Pick. We expect demand for private healthcare to be underpinned by encouraging growth from medical tourists, a growing number of non-communicable diseases (NCD), and ageing society trends. While the healthcare sector generally has defensive attributes, we continue to advocate for investors to lean towards domestic-centric names as these provide better earnings stability.

• Healthcare service providers (HSP). For HSP, the key focus for KPJ will primarily hinge on implementing various key strategic initiatives (central procurement, digital transformation plan and asset optimisation) that have been announced. In driving its hospitals’ operating efficiency, KPJ is expecting the two remaining hospitals under gestation – KPJ Miri and Damansara Specialist Hospital 2 – to break even in EBITDA terms by 2024. As for IHH, its growth strategy will be cemented by its bed capacity expansion plan (looking to add 4,000 more beds) over the next five years. Nonetheless, we anticipate rising competition for nursing staff from its Singapore division following the recent public nurse retention scheme announced by the Singapore Government, which could ultimately lead to a risk of margin compression.

• Health tourism. According to Malaysia Health Tourism Council (MHTC), health tourism is expected to generate revenue of MYR2.4bn in 2024, implying 20% YoY growth vs the estimated MYR2bn revenue in 2023 (revenue as at Nov 2023: MYR1.96bn). Key growth drivers are fuelled by: i) The Government’s decision to grant visa-free entry into Malaysia for up to 30 days, for citizens from China and India; ii) the availability of world-class quality healthcare facilities with services that come at competitive prices; and iii) the ease of accessibility and communication.

• Pharmaceutical segment. For the drugmakers, our outlook is underpinned by RHB economists’ rosier GDP growth expectation for Malaysia in 2024, anchored by China’s positive economic dynamics. A benign interest rate outlook should also be supportive of risk assets. With that, we are positive on Kotra Industries as nutraceutical products are considered discretionary products. Meanwhile, the Government’s higher budget allocation for buying medicine (2024F: MYR5.5bn vs 2023: MYR4.9bn), as well as concluded price negotiations under the Approved Products Purchase List or APPL mechanism (contracts are set to be finalised by 1Q24) should support earnings growth for Duopharma Biotech.

• Outlook and sector pick. We maintain our OVERWEIGHT stance on the healthcare sector, underpinned by relatively inelastic demand trends coupled with rising health awareness among consumers and the trends of an ageing society. KPJ remains our sector Top Pick, premised on its strategic rebranding and upscaling exercise, a gradual pick-up in the health tourism segment, and an improvement in operating efficiency as its hospitals under gestation are expected to achieve EBITDA-breakeven by end-2024. Key downside risks: Higher-than-expected operating costs, lower-than-expected patient visits and revenue intensity growth, and unfavourable changes to the drug pricing mechanism by the Ministry of Health.

Source: RHB Research - 6 Mar 2024