This article first appeared in The Edge Financial Daily on March 23, 2018 - March 29, 2018

Healthcare sector
Upgrade to overweight: KPJ Healthcare Bhd’s inpatient admissions registered a 2.4% year-on-year (y-o-y) growth in financial year 2017 (FY17) after two years of flattish growth, while IHH Healthcare Bhd’s inpatient admissions in its Malaysia operations grew by 2.3% y-o-y (versus 5% in FY16 and 0% in FY15). This may signal a recovery in private healthcare spending after seeing the private hospitals’ inpatient market share decline from the peak of 32.1% in 2013 to 29.4% in 2016. Hospital expansions and greenfield projects from both KPJ and IHH in FY18 should lead to increases in operating beds. We estimate 4% y-o-y and 6% y-o-y inpatient volume growth for KPJ and IHH respectively.

Our studies show that the average number of hospital beds (public and private) was around 1.9 per 1,000 population in 2017, (global average: 2.6). Figures for some states were as low as 1.1 to 1.4, suggesting that there is room for secular demand growth. Rising income per capita and increased insurance coverage are key drivers to support private healthcare expenditures in the long run.

YSP Southeast Asia Holding Bhd and Apex Healthcare Bhd’s FY17 revenues grew by 10% y-o-y and 7% y-o-y respectively, underpinned by a stable growth of around 9% y-o-y in the pharmaceutical market. We saw a rising contribution of local generic drugs to substitute patented and imported drugs. Monthly export numbers of pharmaceutical products from Malaysia have continued to show steady growth in the past few months. We believe all these positive factors support our upgraded “overweight” view on the pharmaceutical sector.

Despite the underperformance of IHH’s and KPJ’s share prices year-to-date, we think that the sector’s earnings prospects are being overlooked. IHH’s earnings growth should return when its new hospitals mature, while KPJ’s new hospital openings should draw higher patient volume growth. We maintain our “buy” rating on YSP due to its growing exports in the Southeast Asia region. Apex’s earnings in FY18 should be supported by a steady demand for pharmaceutical products while contributions from SPP Novo (pharmaceutical manufacturing operations in Cheng, Melaka) by year end will be a growth catalyst in the medium term. — Affin Hwang Capital, March 22