AMINVESTMENT Bank Bhd Research has maintained its neutral rating on the healthcare sector for 2020 but is positive over the long term on the growth prospects for the sector globally underpinned by an aging population, rising affluence and increasing life expectancy.
The research house expects the local private healthcare sector to have an added catalyst, i.e. medical tourism backed by its highly competitive charges and hospitalisation costs (versus those in developed countries), a generally English-speaking population as well as various incentives provided by the government.
“However, we anticipate new hospitals to be hit by gestational costs in the near term as well as the impending drug pricing control (DPC),” it adds.
According to the Pharmaceutical Association of Malaysia, the Ministry of Health (MoH) has announced that it intends to use external reference pricing (ERP) to benchmark drug prices in Malaysia against seven to eight selected countries by choosing the average three lowest reference prices to determine the ceiling price sold to dispensing channels here.
One of the highlights is a phased implementation of the DPC whereby the first phase is to apply the mechanism on single-source products which are generally patent-protected medicine (instead of medicine with generic alternatives).
“We estimate sales of drugs to be circa 20-25% of revenue for the hospitals. Although there is still no clear drug pricing guideline, we believe any impact on the selling price of drugs can be partially covered by other charges (such as hospital bed charges, consumables and medical devices), limiting the impact to its margins,” AmInvest adds.
The research house adds that private healthcare operators in Malaysia may be negatively impacted by a weaker ringgit versus the US dollar as costs of key inputs such as drugs, medical supplies and medical equipment are affected by the USD.
However, it expects a cheaper ringgit might boost medical tourism volume. Medical tourists contribute around 5-6% of IHH Healthcare Bhd and KPJ Healthcare Bhd’s revenue.
AmInvest says it may upgrade its neutral call to overweight should there be a surge in patients due to outbreaks of pandemic diseases, lower-than-expected start-up losses at new hospitals, value-accretive M&As and a jump in medical tourists.
“In contrast, we may downgrade to underweight should there be a significant dropout of patients from private hospitals due to economic reasons, and higher-than-expected and prolonged start-up losses from new hospitals.”
The research house’s top pick is KPJ Healthcare with a buy call (fair value: RM1.12) mainly due to its bright prospects in the industry, vast network of hospitals in Malaysia and positive earnings growth led by capacity expansion.
“We like IHH Healthcare (hold, FV: RM5.40) for its strong prospects in the private healthcare sector backed by rising affluence and the aging population and its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of over 20%,” it adds.
“However, we are wary of the geopolitical risks from its Turkish and China operations due to the volatile currency and political climate. We expect lower foreign exchange exposure for IHH Healthcare,” it adds.
