• Keep OVERWEIGHT; Top Pick: KPJ Healthcare (KPJ). We expect the private healthcare sector to record stronger numbers this year, predicated on organic expansion strategies, visa-free entry into Malaysia for tourists from China and India, a growing number of non-communicable diseases (NCD), rising health awareness among consumers, and a rapidly ageing society. While the healthcare sector generally has defensive attributes, we continue to advocate for investors to lean towards domestic-centric names in view of better earnings stability.

• Healthcare service providers (HSP). For HSP, we expect 1Q24 performance to be muted due to the seasonally shorter working months that coincided with the Lunar New Year celebration. Nonetheless, results for 2H24 and beyond should continue to hold up steadily, underpinned by the organic patient footfall growth, as well as the spillover effect from the influx of foreign patients helped by the implementation of visa-free travel arrangement (with China and India). With that, we think the key focus for KPJ will primarily hinge on the improvement in operating efficiency from hospitals under their gestation periods and the pick-up in the health tourism (HT) segment. We learnt that KPJ has been proactively attending various HT expos overseas this year as it intends to boost up its HT segment contribution to 40% of the group revenue by 2028. As for IHH Healthcare (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 still see various uncertainties ranging from: i) Regulatory risks arising from India (standardisation of private healthcare rates with the public sector) and ii) the hyperinflation environment from Turkey to limit IHH’s near-term share price upside.

• Pharmaceutical segment. We maintain that the pharmaceutical segment should see a robust recovery in 2H24, underpinned by a pick-up in consumer healthcare (CHC) and over-the-counter (OTC) product segments, as well as benefiting from the spillover effect of rising hospital activities and a surge in foreign tourist arrivals. We also expect a pick-up in export sales post reopening of borders, as well as the improvement in economic activities in 2024 (according to RHB Economic’s view) to benefit the manufacturers of generic medicines that we cover. Lastly, the Government’s higher budget allocation for medicine procurement (2024F: MYR5.5bn vs 2023: MYR4.9bn), and concluded price negotiations under the Approved Products Purchase List or APPL mechanism (contracts are set to be finalised by 2Q24) should support earnings growth for Duopharma Biotech.

• Outlook and sector pick. We maintain our OVERWEIGHT stance on the healthcare sector, underpinned by the 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, as well as unfavourable changes to the drug pricing mechanism by the Ministry of Health.

Source: RHB Research - 23 Apr 2024