• Keep O/W; Top Pick: IHH Healthcare (IHH). The private healthcare sector is set to record a stronger 2H24 performance, predicated by organic expansion strategies, and extension of visa-free entry for tourists from China and India. IHH remains our sector pick, underpinned by its relatively steady margin profile, strategic asset location in capturing patient footfall, solid balance sheet, and a more aggressive expansion plan vs its peers.

• Healthcare service providers (HSPs). Private HSP growth here has surpassed the public sector’s (Figure 1) with 3-year CAGR of 2.6% vs 1.7% within 2019-2022. Yet, beds/1,000 population still fell short of a developed nations’(eg Singapore and UK: 2.5, US: 2.4). Under the 12th Malaysia Plan, the Government has set a target of 2.08 hospital beds/1,000 to be achieved by end 2025 – this is seen by an increased healthcare budget capex for 2024 (+13% to MYR6.1bn). Several new private sector expansion plans have also been announced by the HSPs over the past few months (Figure 4), as the private players undertake initiatives to expand their local presence. We estimate private hospital beds to grow further by at least 2.9% CAGR in 2022-2025, considering the various project pipelines in place. Sunway Healthcare Group (SHG) has the most ambitious plan: 1,600 new beds by 2030 – aiming raise total bed capacity to 3,000 (2024F: 1,400).

• Health tourism (HT). IHH has the largest share on an absolute basis, with HT revenue of c.MYR220m in 2023 or 11% of Malaysia’s total HT revenue. This is followed by 10% and 9% from KPJ Healthcare (KPJ) and SHG. On relative basis, SHG has the largest share of HT revenue contributions at 10% of topline (IHH and KPJ c.5-6%). This is due to Sunway Medical Centre’s strategic presence within its integrated township at Sunway City, which is surrounded by matured residential neighbourhoods, an integrated resort, a university, hotels, shopping galleries, and commercial buildings.

• Pharmaceuticals. We maintain our view that the pharmaceutical segment should see a robust 2H24 recovery, underpinned by a pickup in consumer healthcare and over-the-counter product segments. Acceleration in trade and manufacturing activities, as suggested by RHB Economics, should underpinned the growth of pharmaceutical firms with export exposure – eg Kotra Industries (32%) and Duopharma Biotech (Duopharma) (8%). Meanwhile, the higher government budget allocation for medicine procurement (2024F: MYR5.5bn vs 2023: MYR4.9bn) and recent concluded price negotiations under the Approved Products Purchase List or APPL should support earnings growth for Duopharma.

• Outlook and sector pick. We maintain our OVERWEIGHT stance on the healthcare sector and favour IHH as our Top Pick, predicated by its robust balance sheet (net gearing 0.26 vs KPJ’s 0.49), established medical technology infrastructure, and appetite for inorganic growth. IHH’s valuation remains attractive, trading at 12.2x 2024F EV/EBITDA or 0.6SD below its 15x historical mean. KPJ is trading at an 8% premium over IHH vs relative valuation historical means of -14.5% for both, which we deem unjustified, given IHH’s more aggressive expansion plans to drive growth.

Source: RHB Research - 24 Jul 2024